NFP Smashes Estimates as US Unemployment Rises to 7-Month High

Key points of the US jobs and jobs report:

• The US added 339,000 jobs in May, beating the median forecast of 190,000 new jobs. Meanwhile, April’s number was revised higher to 294,000.
• The unemployment rate rose to 3.7%, the highest level in 7 months.
• Hourly earnings averaged 0.3% MoM with print down year-on-year to 4.3%.
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U.S. employment accelerated during May as the economy added 339,000 jobs in May 2023, beating expectations of 190,000 and a rate of 294,000 in April. According to the US Bureau of Labor Statistics, employment continued to trend upward in professional and business services, health care, construction, transportation, warehousing, and social assistance.

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The unemployment rate was 3.7% (7-month high) with the number of unemployed now at 6.1 million. It is important to note that the unemployment rate has ranged from 3.4% to 3.7% since March 2022, so is the unemployment rate finally going up towards 4%?

Looking closely at the Employment Survey, average hourly earnings which remain a strong measure of inflation for the Fed, rose 0.3% month in line with expectations, bringing the annualized rate back to 4.3% from 4.4% previously. The April reading was revised on a monthly basis down from 0.5% to 0.4% as well. This print is perhaps the only positive for the Fed as, despite the strong jobs numbers, earnings did not appear and is unlikely to add further pressure on services prices as we head into the summer months. The data saw the odds of a 25 basis point rate hike in June rising to 34% from 25% before the release.

Source: CME FedWatch

The Federal Reserve and the Way Forward

The debt ceiling deal that has cast a cloud over the markets recently has been largely resolved as it makes its way to US President Joe Biden’s desk. Markets have responded positively so far with risky assets taking over bid once the debt ceiling agreement passes through the House and Senate and a weaker US dollar as many expected.

However, the decline in the US dollar can also be attributed to the growing chatter regarding a possible Fed halt in June. There are some policy makers who think that a pause might be appropriate as the markets seem to be feeling the pinch lately as the effect of the rate hike is rippling through the economy. However, the data remained a concern with the PCE (the Feds’ preferred measure of inflation) rising and the overall inflation picture remaining a concern. As mentioned above, the average hourly earnings is a plus for the Fed and the inflation picture as a whole, while the high unemployment rate may be cause for pause from the Fed. This will allow the central bank some time to better assess the impact of rate hikes as the ‘lag effect’ finally appears to be over.

It looks as if the dollar itself has been bitten by a pullback at this point. The dollar may find some support thanks to higher interest rates on dollar deposits which may prevent a major sell-off in the greenback, but the Fed’s pause in June may make the dollar index (DXY) vulnerable to a push towards the psychological 100.00 mark.

Market reaction

EURUSD daily chart

Source: TradingView, prepared by Zain Fouda

Initial reactions to the EURUSD saw the dollar strengthen and gain nearly 30 pips back below 1.0750. Looking at the bigger picture, EURUSD enjoyed a stellar Thursday as it finally looked like the USD rally was starting to fade. The 1.0680-1.0700 handle has been key lately as it continues to offer support with a bullish close yesterday suggesting further upside and a deeper pullback.

Key levels worth seeing:

support areas

areas of resistance

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @employee