Solid payroll gains keep the dollar supported
The US economy added 172k to nonfarm payrolls in May, based on initial figures, above all estimates submitted to Bloomberg.
Accompanied by no change in the unemployment rate, which remains at 4.3%, this is another set of indicators suggesting that the US economy is doing just fine, despite ongoing disruption to global energy supplies. For the FOMC, attention should remain squarely on inflation ahead of the May CPI release due next week, and a rate decision on June 17th. While an immediate change in the federal funds rate still looks unlikely, odds increasingly skew toward a hawkish tone from newly installed Chair Kevin Warsh later this month.
Indeed, while many had speculated that the new Fed Chair would likely lean dovish relative to his predecessor, Jerome Powell, we think recent data prints have significantly reduced his room for manoeuvre.
Nor do the details of the May jobs report offer much reason to think that the solid headline readings are masking weakness below the surface. Granted, strong public sector job creation, with 52k gains in May, after 2k in April and 12k in March, helps to pad out the numbers. But 70k roles added across leisure and hospitality is well above the 14k average monthly rise seen over the past year, with a 48k increase for employment in food services particularly notable – pointing to a US consumer that remains resilient, despite rising energy costs.
Other key data points largely matched expectations in May. Average hourly earnings were recorded growing 0.3% MoM, and 3.4% YoY. The latter represents a 0.2pp fall relative to April, but that is still a solid, albeit not spectacular, rate of pay increase. Labour force participation remains at 61.8%, with weekly average hours worked similarly unchanged at 34.3, while the underemployment rate ticked down from 8.2% to 8.1% last month.
Putting all this together, we see little reason for the FOMC to be worrying about the full employment side of their mandate when they meet later this month.
If anything, the resilience seen across recent labour market readings should see a ramp-up in price growth concerns at the Fed. That creates a potential headache for Chair Warsh, who many believe was appointed on a promise to cut rates. As of writing, swap implied odds of a 2026 rate hike now stand at 99%, up from around 60% earlier in the day. Assuming no major downside surprise from next week’s CPI release, we suspect the committee as a whole will want to signal at least a willingness to tighten policy, endorsing market expectations. In order to retain credibility, we think Warsh will be forced to go along with this, too. Such a shift should support the dollar into mid-year, with the DXY index having already added 0.3% post-release as markets digest these latest developments.