May payrolls will set tone for June markets
Friday, May 28, 2004 11:14:56 PM
WASHINGTON (AFX) -- The May U.S. payrolls report could be the catalyst that knocks U.S. investors off the fence
U.S. financial markets have been treading water for a month, waiting for something or someone to force a move one way or the other. Stocks, bonds, currencies and even commodities have gyrated over the past 30 days, but are now back close to levels seen in late April. The mostly-healthy-but-not-overpowering economic data have been offset by higher energy prices and worries about terrorism. Worries about inflation have waxed and waned, along with expectations about how fast the Federal Open Market Committee will raise interest rates
The May nonfarm payrolls report on Friday could settle at least some of the questions about the Fed and the economy, opening the way for a breakout in financial markets one way or the other
Some of the markets' other troubles could be addressed at the OPEC meeting on Thursday. Following growth of 337,000 in March and 288,000 in April, nonfarm payrolls are expected to rise about 220,000 in May, according to a survey of 27 economists conducted by CBS MarketWatch. The forecasts ranged from 135,000 to 300,000.
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The jobs figures will be released Friday at 8:30 a.m. Eastern. Economists expect the jobless rate to remain at 5.6 percent and expect average hourly wages to grow 0.2 percent in April, or 2 percent year-over-year
'Measured' Fed The payroll figures could loom large in the Federal Reserve's calculations about when to raise interest rates and how aggressively it should move. The Fed has promised a "measured" response to stronger growth and higher inflation, but has not explained exactly what "measured" means
If the economy continues to expand slightly above trend with a modest acceleration in inflation, economists and market participants would expect quarter-point rate hikes at three or four of the five remaining FOMC meetings this year, leaving the federal funds rate at 1.75 or 2 percent. It would take a strong reading of more than 250,000 "or a sharp jump in wages, to be a damper for financial markets," said Avery Shenfeld, economist for CIBC World Markets. A strong reading on either payroll growth or wages could spark renewed calls for a stronger response from the Fed, perhaps half-point increases that would bring the fed funds rate rapidly toward a neutral level around 3 percent. On the other hand, a weak payrolls reading could ignite a rally in the bond market if it looks like the Fed will be forced into a slower path
"Given that expectations are heavily skewed toward a 25 basis point tightening move on June 30, it will take a weak report (say 125,000 or less payroll growth) to cause markets to begin to reassess this scenario," said Joshua Shapiro, chief economist for MFR
Other aspects of the payroll report will bear watching. Wage growth as reported by the Labor Department's establishment survey has been weak, keeping a lid on inflationary pressures. But recent revisions to data from state employment offices not yet incorporated in the payroll survey show stronger wage growth. Perhaps wages or job growth are not so weak after all, a threat to the Fed's theory about a large output gap
"A significant upward revision to payrolls" seems likely, said Maury Harris, chief U.S. economist for UBS. Harris believes unit labor costs (and therefore inflationary pressures) are likely higher than we now believe
Others disagree. "Our sense is that the recovery in employment is too recent to have had much of an impact on worker wage demands as there remains a significant amount of slack in the system," said Joe Abate, an economist for Lehman Bros
Lehman figures the economy would need to create 1.9 million jobs by the end of the year to drive the unemployment rate back down to 5 percent, if work-force participation rates remain at cyclical lows of 65.9 percent
However, it's likely that better hiring conditions would lure many people back into the labor force, pushing the participation rate back toward 2000's all-time high of 67.3 percent. If so, then any inflationary pressures from wage demands would take even longer to surface. Economists are watching the participation rate nearly as closely as they are the unemployment rate. Other data As always, the Institute for Supply Management index will get a close reading on Tuesday. This diffusion index of sentiment among manufacturing executives is considered one of the most reliable leading indicators of economic activity. The data are due at 10 a.m. Tuesday. The ISM has been above 60 percent for six straight months, a feat not seen for 20 years. Economists expect a seventh month in May, with a reading of 61.6 percent
The consensus may be lower than the "whisper" numbers in the markets, following the surprising leap in the similar Chicago purchasing managers index to a 16-year high of 68.0 percent in May
"The report should confirm that strong domestic demand, lean inventories, and solid export growth have factory activity running at full-throttle," said Rick MacDonald, an economist for Action Economics. The week's other data will get little notice in the markets
Auto sales are expected to have accelerated to an annual pace of 13.4 million in May. Retail chains will also report on their May same-store sales, with 5 percent year-on-year growth expected. Factory orders likely dropped 1.3 percent in April. Productivity in the first quarter could be revised to 3.7 percent from 3.5 percent. Construction spending probably increased 0.4 percent in April. This story was supplied by CBSMarketWatch. For further information see www.cbsmarketwatch.com
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