Payroll call

U.S. Payroll Report (June 5th Release) Overview

• Total non-farm payrolls (NFP) significantly exceeded all expectations, including Bank of America's above-consensus forecast.
• Private sector jobs added 120,000 (vs. BofA 100K forecast; above consensus), averaging 100,000 over five months and 160,000 over three months.
• Upward revisions of 93,000 were applied to the previous two months, marking the highest revision level since January 2023.
• Headline strength driven primarily by two sectors:
  • Leisure and hospitality added 70,000 jobs within 92,000 private service jobs.
  • Local government non-educational roles added 50,000 jobs (e.g., infrastructure, security).
• Strategists attribute 60,000–100,000 of the surplus to "early World Cup hiring," predicting a payback (negative revision) in the August report.

Household Survey Data

• Household employment rose by 150,000, the first increase recorded this year.
• Unemployment declined by 66,000; rounded unemployment rate held at 4.3%, while the unrounded rate fell from 4.337% to 4.296%.
• Alternative metrics (U2 and U6) improved, though the duration of long-term unemployment increased.
• Fed strategists note the 4.3% unemployment rate indicates sufficient labor slack to focus on the inflation mandate without immediate risk of re-acceleration.

Federal Reserve Policy Outlook

• Risk Distribution: The report shifts risk distribution in a hawkish direction, increasing probability of a rate hike, though BofA maintains a base case of rates "on hold" for the remainder of 2024.
• Fed Constraints: Fed strategists cite the flat unemployment trend and stable/declining wage growth (3.4% year-over-year) as key reasons to look through the strong jobs data rather than hike immediately.
• FOMC Sentiment: Increased hawkishness noted among members (e.g., Waller, Logan, Harker); potential for 2–3 members to include hikes in the June dot plot.
• Jerome Powell (Chair): Current pricing reflects high skepticism that Powell will act before the U.S. midterms; strategists anticipate Powell will align with Senate testimony concerns regarding inflation at the June meeting.
• Future Data Dependencies:
  • CPI: Critical read-through to Core PCE expected to influence immediate market reaction; forecast for 0.20% core CPI.
  • University of Michigan Survey: Deemed less critical as the Fed has "looked through" it previously; strategic focus shifts to the new Federal Reserve Inflation Expectations survey.

Fixed Income Market Reaction

• Two-year Treasury yields rose over 10 basis points; the yield curve flattened.
• Current pricing (2-year up ~12.5 bps, 5-year up ~10 bps) aligns with BofA's pre-report range for a data beat of this magnitude.
• Market pricing implies ~14 basis points of hikes priced in through October (pre-midterms) and ~24 basis points through December, with first hikes priced for January and ~50% odds of a second hike by mid-2025.
• Strategists disagree with market pricing, believing the "high bar" for hikes before the midterms is artificial and will be reassessed following Powell's June commentary.

FX Market Dynamics

• Dollar Performance: The U.S. dollar rallied broadly against G10 currencies (up 0.5%–0.75%), breaking out of a three-week consolidation range.
• Exceptions: The Canadian dollar outperformed relative to the dollar, driven by a similarly strong Canadian jobs report.
• Headwinds: Dollar appreciation restrained by:
  • The unemployment rate holding flat rather than declining.
  • Market reluctance to price near-term hikes absent a clear shift from Chair Powell.
  • Geopolitical risk (Iran war/Strait of Hormuz) creating paralysis in positioning.