Steady payrolls and slowing inflation may give rise to the not-too-hot, not-too-cold Goldilocks outlook. But the doubtful quality of jobs creation, ongoing concerns in housing and rising energy prices may bring back the three bears. The higher than expected 157,000 increase in May payrolls and 4.5% unemployment rate are a confirmation of the positive signs reflected in falling weekly jobless claims over the past four weeks. The payroll figure boosts the three-month average to 137,000 from 115,000, which was the lowest since January 2005.
Payrolls Quality vs. Quantity The strength in May payrolls has largely emerged from services jobs, the durability of which remains doubtful. Sectors such as leisure/hospitality, education/healthcare and professional/business services have shown solid employment creation between 40,000 to 60,000 positions, but the quality of such jobs leaves a question mark as to their livelihood and thus earning potential.
This contrasts with the manufacturing sector, which lost 19,000 jobs in May, its eleventh-consecutive monthly decline. Over the last 12 months, manufacturing has lost 176,000 jobs.
The 5,000 net loss in retail jobs following April’s 24,000 decline may also be a reflection of the slowdown in nation’s retailers, especially in light of the International Council of Shopping Center’s April report, showing the worst performance for that month.
Construction jobs came in flat (0K) after a 21,000 decline in April, which may lend support to the notion of stability in the housing sector. Nonetheless, we should bear in mind that building permits fell 8.9% in April, reaching their lowest level since June 1997 and marking the tenth decline in the last twelve months. This may not bode well for future construction and could weigh on the prospects for future housing starts.
The higher than expected rebound in manufacturing ISM, to 55 vs. 54, serves as a valid support of stabilizing manufacturing conditions, but does not alter the deterioration in manufacturing conditions. Such surveys are diffusion surveys resulting from questionnaires and may not carry as the same weight as the evidence in the employment front.
The higher than expected 0.5% increase in April personal spending following an upwardly revised 0.4% in March may be a result of consumers spending of their tax refunds, but the figure comprises a vital positive in boosting second quarter personal consumption expenditures (PCE). The unexpected 0.1% decline in personal incomes may have been a partial payback of the revised 0.8% increase in March.
2.0% Core PCE confirms the peak in inflation Today’s core PCE price index figure of 2.0% marks a vital step in the Fed’s inflation vigilance and a closer step towards achieving a neutral policy bias. This is the first time the figure is within the Fed’s preferred 1.5% to 2.0% range since February 2005. With core PCE price slowing to 2.0% from 2.1% and April core CPI slowing to 2.3% from 2.5% y/y, its lowest rate since March 2006, the question becomes whether the Fed will reword the predominant concern in its June FOMC statement, thus moving towards a neutral policy stance. The Fed will have the May CPI figures available on hand at the June 27-28 meeting, which should help determine its stance inflation stance.
Further slowdown in housing combined with a prolonged a retreat in inflation and a retrenching U.S. consumer could be expected to sway the Fed towards a rate cut in third quarter and as early as June. This should also depend on the extent of a retreat in U.S. equities, which could take place on the heels of emerging concerns in housing and rising fuel prices.
The 3.2% decline in the April pending home sales index following a 4.5% decline in March deserves attention, especially when this index is known to track existing home sales. Although new home sales registered a record increase in April, the accompanying decline in existing home sales shows that the slowdown in housing may yet show further deterioration, especially when building permits are taken into account.
FX implications The dollar is stabilizing after a knee jerk slide reaction downwards immediately after traders centered on the fact that the core PCE price index slowed to 2.0%, thereby meeting the Fed’s preferred inflation range. The combination of an unchanged unemployment rate of 4.5% and the rise in ISM manufacturing, coupled with improved consumer spending may ease expectations for a summer rate cut, which will trigger further paring in USD shorts. This combination of strengthening risk appetite and reduced dollar shorts supports further gains in the carry trades that do not involve the U.S. dollar, such as rising USD/JPY, GBP/JPY, NZD/JPY, NZD/GBP but downside pressure on EUR/USD, GBP/USD and EUR/GBP.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY (212) 644-4220a.laidi@cmcmarkets.com
