MNI US MARKETS ANALYSIS: Just Under 50bp Of '24 Fed Cuts Priced Ahead Of NFPs

US DATA: Nonfarm Payrolls: +188k Seen In MNI Dealer Median

Recapping the main expectations for today's May Employment Report (0830ET/1330UK), from our Payrolls preview out yesterday (PDF here):

• Nonfarm payrolls are expected to partially rebound in May from April’s surprisingly low 175k, with 188k in headline gains per MNI’s sell-side analyst median.
• While still an acceleration from the prior month, the consensus outcome if realized would be seen as reinforcing the view that the labor market has shifted into a softer but still-solid phase of growth.
• The rebound is seen being led by a recovery in government job gains. Private payrolls are seen posting a fairly flat rise of roughly 160k, vs 167k in April, with health and social assistance sector payrolls still providing the biggest boost.
• Bloomberg consensus sees payrolls growth of 185k, with private payrolls up 165k.
• Other key statistics are seen remaining relatively steady, including the unemployment rate (April: 3.9%, or 3.86% unrounded), with average hourly earnings ticking up to 0.3% M/M (April: 0.20% M/M unrounded).
• MNI's Dealer Median table is below:

CANADA DATA: Employment Report Due At 1330BST/0830ET

Alongside the key US Employment data on Friday, Canada will also report jobs data for May. The data follows the Bank of Canada decision on Wednesday to cut rates by 25bps to 4.75% and a full recap of that decision can be found here.

• Within the BOC’s statement, the governing council noted that “labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population. Wage pressures remain but look to be moderating gradually.”
• May’s net change in employment is expected to come in at +22.5k, down from a prior +90.4k increase, and as usual, the split between full time and part time adjustments will be monitored closely. Correspondingly, the unemployment rate is seen ticking up to 6.2%. With one factor the BOC remains particularly focused on being wage growth, attention will be on the hourly wage rate for permanent employees, which is expected to fall one tenth to 4.7% Y/y.
• USDCAD is trading within a range. Key support has been defined at 1.3590, May 16 low. The post BOC high of 137.41 is the immediate area of topside interest. For bulls, a stronger resumption of gains would refocus attention on the bull trigger at 1.3846, the Apr 16 high.

• TD Securities look for the April hiring surge to give way to softer labour market conditions in May with 15k jobs added as the unemployment rate climbs 0.2pp to 6.3%, both relatively negative assumptions considering the median Bloomberg surveys. TD note that Canadian employment data has a history of mean-reversion after large gains, which raises the bar for another above-trend performance in May. Softer wage growth should add to the more dovish tone, with AHE for permanent workers forecast to slow 0.1pp to 4.7% y/y.
• CIBC: Canada’s labour market likely continued to gradually loosen in May, with the unemployment rate ticking up to 6.2% on a 20K increase in jobs. An easing in job creation would be in line with sluggish domestic demand towards the end of the first quarter and the more reliable payrolls survey of employment that is tracking weaker over the past twelve months, as well as the increase in business bankruptcies seen so far this year. Wage growth for permanent employees likely remained around the 4.8% y/y pace seen in April.
  • The unemployment rate is likely close to peaking as lower interest rates will put a floor under demand and labour market activity in the months ahead.
• Scotiabank have estimated a rise of 30k with a slight up-tick in the unemployment rate to 6.2%. Wage growth may accelerate again after a mild soft patch in April (+0.1% m/m SA) along a volatile trend.
  • What this estimate is mainly banking on is the continued filling of vacancies by very rapid population growth. That could be a particularly powerful effect into the summer job market.
  • Interestingly, the massive surge of temporary/non-permanent residents in the 15–24 category is a standing army of folks willing to work in seasonal roles across sectors like accommodation and food services.

MNI POLITICAL RISK - European Parliament Election Preview

Voting is underway in the multi-national elections to the European Parliament (EP). Across the EU’s 27 member states over 361mn voters will be eligible to cast their ballots to elect the 720 members of the European Parliament (MEPs), making it the second-largest democratic exercise on Earth behind only the Indian general election. The election in the Netherlands takes place on 6 June, with other member states holding theirs on subsequent days until 9 June, when member states representing nearly 90% of the EU’s population cast their ballots.

• In this preview we outline how the election works across the EU’s member states and when we can expect results to come through; an explainer of the political groups that sit within the EP; an analysis of the potential impact of the election, a chartpack of opinion polling in the leadup to the vote; and a comprehensive slate of sell-side views on the elections.
• Click for full preview.

US TSYS: Focus on Headline Employment Data for US and Canada

Treasuries are moderately lower, taking cues from European bourses after strong Eurozone Q1 wage data pressured core/semi-core EGBs overnight.

• Treasury futures hold to a narrow overnight range on lighter volumes (TYU4 just over 250k) in the lead-up to this morning's US employment report for May at 0830ET, 180k jobs gain anticipated vs. +175k prior. Canada employment report also due at 0830ET.
• Sep'24 10Y Treasury futures are trading -3.5 at 110-08 -- inside 4 tic range: 110-06 low/100-04 high. Despite the dip, Treasuries maintain a firmer short-term tone and the contract is trading closer to its recent highs after the Sep 10Y contract traded through resistance and a bull trigger at 110-09, the May 16 high. The break higher opens 110-17, the Apr 4 high, and 110-27+, a Fibonacci projection.
• Cash yields are currently mildly higher: 2s +.0096 at 4.7337%, 10s +.0096 at 4.2967%, 30s +.0083 at 4.4436%, while curves are running mildly mixed: 2s10s +0.011 at -44.106, 5s30s -0.101 at 13.323.

STIR: OI Points To Sizeable Net Long Setting In SFRM4 On Thursday

The combination of yesterday’s modest uptick in most SOFR futures and preliminary OI data points to a mix of net long setting and short cover, with a notable move lower in the final Q1 unit labour cost print helping the direction of travel:

• Whites: Net long setting dominated, although that was only a result SFRM4 positioning movement on sizeable buying of that contract during the NY afternoon. Apparent short cover in SFRZ4 provided the other net OI swing of note in the pack.
• Reds: A mix of net short cover and long setting (with SFRZ5 the only contract to see net long setting in the pack) roughly offsetting.
• Greens: Net long setting dominated in net pack OI terms, mostly driven by SFRZ6, with rounds of net short cover also seen.
• Blues: A bias to net long setting in the pack, driven by SFRZ7.
• Net FOMC-dated OIS still prices a little under 50bp of ’24 cuts, with relatively tight ranges in play across U.S. FI markets on Thursday.
• This leaves U.S. STIRs comfortably away from recent hawkish extremes, which, when coupled with positioning metrics and the recent flow of labour market data, provides better two-way risk into today’s NFP release (compared to prevailing dynamics seen a few weeks ago).
• The first 25bp Fed cut is still more than fully discounted through the November FOMC, with ~80% odds of a cut through the end of the Sep FOMC currently priced.

EGBS: Strong Eurozone Q1 Wage Data Weighs On EGBs; NFP In Focus

Core/semi-core EGBs were pressured after Eurozone Q1 compensation per employee accelerated in Q1.

• The 5.1% Y/Y figure exceeded Eurosystem staff’s latest forecasts of 5.0% and Q4’s 4.7% reading. See our earlier post for more colour there.
• Prior to that release, Bund, OAT and BTP futures had traded in relatively contained ranges as markets await today’s US labour market data at 1330BST.
• ECB speakers have not been market moving, re-iterating yesterday’s guidance that the Bank is not pre-committing to a particular rate path.
• Bund futures are -29 at 130.69, though remain firmer this week. The latest recovery appears to be a correction for now, with bulls needing to breach 131.73, the 50-day EMA, to signal scope for a stronger recovery.
• 10-year peripheral spreads to Bunds are wider with European equities on the defensive.
• The aforementioned US labour market report remains today’s focus.
  

FOREX: USDJPY Under Renewed Pressure As NFP Approaches

Daily adjustments for G10 currencies on Friday are understandably small given the close proximity to the key US employment report for May. However, there was some renewed USDJPY weakness in early European trade, which saw the pair print as low as 155.12 from its overnight peak of 155.94.

• With US yields consolidating at the week’s lowest levels heading into the data, there are clear two-way risks for the Japanese Yen, which remains the most sensitive to key US releases.
• The pair sits just 0.06% lower and it’s important to note that the key support zone, between 154.76, the 50-day EMA, and 154.17, a trendline drawn from the Dec 28 low, remains in place. A clear break of this key zone would be bearish and highlight a stronger reversal.
• Elsewhere, reserves data revealed a flatlining in China's gold holdings in May, bringing an end to an 18-month run of buying from the Chinese authorities. This has prompted a sharp $40 move lower for the yellow metal, and in turn supported a modest pull higher for the greenback, albeit brief as the DXY returned quickly to unchanged levels on the session.

FX OPTIONS: Expiries for Jun07 NY cut 1000ET (Source DTCC)

• EURUSD: 1.0875 (662mln), 1.0880 (565mln), 1.0885 (1.02bn), 1.0895 (540mln), 1.0900 (1.14bn), 1.0940 (273mln), 1.0950 (427mln)
• GBPUSD: 1.2800 (545mln)
• USDJPY: 154.50 (1.07bn), 155.00 (457mln), 156.00 (382mln)
• USDCAD: 1.3675 (358mln), 1.3680 (479mln)
• AUDUSD: 0.6600 (1.17bn)
• USDNY: 7.2500 (877mln)

EUROZONE DATA: Compensation Per Employee Accelerates Above ECB Forecasts In Q1

Eurozone Q1 compensation per employee was 5.1% Y/Y, above Q4's 4.7% and the ECB's forecast of 5.0%.

• The 5.0% Y/Y compensation per employee forecast noted above is taken from the latest Eurosystem projections here.
• In yesterday's press conference, Lagarde noted that "If you look at compensation per employee based on what we can calculate on the basis of 15 countries, it was 4.7%."
• The 5.0% Y/Y figure is from Eurosystem (i.e National Central Bank) forecasts, while Lagarde likely quoted forecasts made by ECB staff. This may explain some portion of the discrepancy. There may also have been different cut-off dates/data used to compute the two forecasts.
• Additionally, Lagarde was asked about whether the ECB would only make decisions in forecast meetings (so this bit isn't explicitly on wages), but she said: "Regarding your first question, first of all, those are not our projections. Those are the projections of staff. And it’s obvious that projections produced by staff on a regular basis are very informative, go deep into the data that we receive, analyse at length, produce scenarios, analysis, sensitivity analysis, and that this is very helpful for us to make decisions. "

EQUITIES: S&P E-Minis Trend Needle Points North

In the equity space, the uptrend in S&P E-Minis remains intact and this week’s gains reinforce this set-up. The contract has traded above 5368.25, the May 23 high and bull trigger. The move confirms a resumption of the uptrend. A continuation higher would signal scope for a climb towards the 5400.00 handle next. On the downside, key short-term support has been defined at 5205.50, the May 31 low.

• Recent weakness in EUROSTOXX 50 futures appears to have been a correction. The recovery from 4947.00, the Jun 4 low, signals the end of the corrective cycle and attention is on key resistance and the bull trigger at 5110.00, the May 16 high. Clearance of this level would confirm a resumption of the uptrend. Key support is 4947.00.

COMMODITIES: Key Support In Gold Lies At The 50-Day EMA

• On the commodity front, a short-term bear cycle in Gold remains in play for now. Note that the medium-term trend structure is bullish and the recent move down appears to be a correction that is allowing an overbought condition to unwind. Moving average studies are in a bull-mode position, highlighting an uptrend. Key resistance and the bull trigger is $2450.1,the May 20 high. The 50-day EMA, at $2314.4, represents a key support.
• In the oil space, despite the latest recovery in WTI futures, a bearish theme remains in play. Price has recently cleared $73.24, the 76.4% retracement of the Dec 13 - Apr 12 bull leg. This reinforces the current bearish theme and signals scope for a continuation. Sights are on $71.33 next, the Feb 5 low. Initial resistance is at $76.15, the May 24 low and a recent breakout level.

GOLD: Gold Lower As 18-Month Run Of Official Chinese Buying Comes To An End

Gold pulls lower as monthly reserve data reveals a flatlining in China's gold holdings in May, bringing an end to an 18-month run of buying from the Chinese authorities

• Chinese gold purchases were seen as a major driver of the gold rally over that period, with official Chinese holdings increasing from ~62.6mn/oz in October ’22 to ~72.8mn/oz.
• Plenty of other EM nations also increased their exposure to gold over that horizon, with the global inflationary shock and a want to be less exposed to U.S sanctions touted as the key drivers of that demand.
• Elsewhere, many pointed to a de-dollarization angle, as various countries looked to become less reliant on the USD via bilateral and multi-lateral trade agreements. The USD is incrementally firmer in the wake of the Chinese data.
• Some had also pointed to the increase in Chinese metal holdings as potential signal of an imminent CNY devaluation.
• It will be interesting to see how broader EM official gold holdings evolve in the coming months, with one of the big buyers of bullion potentially having to be replaced from a flow perspective (if Chinese purchases do not resume).
• Note that Russia has the 5^th largest official reserve holdings of gold globally, while China has the 6^th last holdings (per World Gold Council Data as of end Q124).
• Technicals for gold remain unchanged although spot has breached yesterday’s lows, last a little above $2,330/oz.
• A short-term technical bear cycle has been identified, with next support at the 50-day EMA ($2,314.5/oz).

Source: World Gold Council