Hot Jobs Report Pushes Rates Higher

Total nonfarm payroll employment increased by 272,000 in May, surpassing economists’ expectations of 190,000. This is up from a revised 165,000 in April, marking the second biggest report this year.

Breaking It Down: It was a pretty well-rounded report. Health care led the way with 68,000 new jobs followed by:

• Government added 48,000 jobs.
• Leisure and hospitality saw an increase of 43,000 jobs.
• Professional, scientific, and technical services gained 32,000 jobs.
• Social assistance added 15,000 jobs.

Unemployment Rises: Despite the impressive job gains, the unemployment rate rose to 4.0%, up from 3.9% in April, reaching the highest level since January 2022. However, this is probably due to new job seekers entering market and not because of people losing their job.

Wages Rise: Average hourly earnings for all employees on private nonfarm payrolls rose by 0.4% in May, exceeding economists’ expectations of a 0.3% rise.

• Year-over-year, wages are now up 4.1%, higher than the 3.9% economists were projecting and up from 4.0% in April.

Market Reaction: Bond yields surged, with the 10-year yield jumping 11 basis points to over 4.40%, wiping out this week’s bond rally.

Mixed Signals: The divergence between the establishment survey and the household survey seems to have never been wider. While the establishment survey is reporting a 272k jump in employment, the household survey shows a loss of 408,00 with the participation rate falling to 62.5% in May.

What they’re saying:

• Heather Long at the Washington Post tweeted “The “‘obs report’ is actually 2 different surveys. The “Establishment Survey” of business HR data shows the big +272,000 job gains. The “Household Survey” of workers is the survey showing signs of a cooling economy. At some point these surveys will converge again…”
• Anna Wong, Bloomberg economist, noted “May’s jobs report presented contradictory views of the labor market, as we expected. The establishment survey shows robust gains in nonfarm payrolls — yet the unemployment rate rose to 4.0%. We believe the latter currently offers a closer approximation of reality than payrolls, as BLS’ model for estimating business births and deaths – which added 231,000 jobs to the nonfarm-payrolls print in May – is lagging the reality of surging establishment closures and falling business formation. We think the underlying pace of current job gains is likely less than 100,000 per month.”

So What Does It All Mean: Regardless of what the household survey says, the establishment survey is the gold standard. It is what the Fed watches and therefore dictates how the markets will react. All eyes will be on the Fed next week where it is quite possible that Jerome Powell could kill any hope of a rate cut this year.