All Eyes on Friday’s May Jobs Report

This holiday-shortened week will have all eyes already trained on Friday when we get the May Employment Report. The report will likely set the tone for the upcoming June FOMC meeting on the 16th. Will it be a strong result like March or will it be another mediocre report like April? The Fed has made clear they are willing to absorb hotter inflation numbers in the interim while they wait for the labor market to return to pre-pandemic levels. The question is how long will that wait be and that is dependent on how quickly those 8 million or so jobs still missing will be made up. The expectation for May is that the report will look more like March with 650 thousand new jobs expected and unemployment dipping two-tenths to 5.9%. A three-month average for job gains of approximately 562 thousand still implies fifteen months to recoup the job shortfall. That would put us in mid-2022. The question is can the jobs market print 500 thousand gains on a consistent basis as the impact of stimulus and reopening starts to fade a bit? That seems a stretch, thus we look more towards the end of 2022 with some slippage into 2023. That would line up pretty closely with an expected rate lift-off later in 2023 or early 2024.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.01% +0.01%
6 Month 0.03% +0.01%
1 Year 0.04% Unchanged
2 Year 0.15% Unchanged
3 Year 0.30% -0.02%
5 Year 0.81% -0.01%
10 Year 1.62% -0.01%
30 Year 2.30% -0.03%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.13%
6 Mo LIBOR 0.17%
12 Mo LIBOR 0.25%
Swap Rates  
3 Year 0.432%
5 Year 0.897%
10 Year 1.589%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Jun 1 ISM Manufacturing May 60.9 61.0 60.7
Jun 3 ADP Employment Change May 678k 648k 742k
Jun 3 Initial Jobless Claims May 29 395k 385k 406k
Jun 3 ISM Services Index May 63.0 63.0 62.7
Jun 4 Change in Nonfarm Payrolls May 650k 650k 266k
Jun 4 Change in Private Payrolls May 600k 600k 218k
Jun 4 Unemployment Rate May 5.9% 5.9% 6.1%
Jun 4 Underemployment Rate May 10.1% 10.1% 10.4%
Jun 4 Average Hourly Earnings YoY May 1.6% 1.6% 0.3%

Top 5 Events for the Week

June 1—4, 2021

1.  May Employment Report—Friday

The May jobs report will likely set the tone for the upcoming June FOMC meeting on the 16th. Will it be a strong result like March or will it be another mediocre report like April? The Fed has made clear they are willing to absorb hotter inflation numbers while they wait for the labor market to return to pre-pandemic levels. The question is how long will that wait be and that is somewhat dependent on how quickly those 8 million or so jobs still missing will be made up. The May median expectation is for a gain of 650 thousand jobs with the unemployment rate dropping from 6.1% to 5.9%. That would put the month close to March’s  770 thousand jobs and well clear of April’s 266 thousand jobs. The broader underemployment rate is still in double-digits at 10.4%. It was as low as  6.8% in December 2019 and that is what the Fed will be looking to get back to before hailing the recovery as complete. That still seems a long way off.

2. May ISM Manufacturing—Tuesday

In addition to the employment numbers, we get another big May economic report in the form of the ISM Manufacturing Index later this morning. Combined with the jobs report on Friday and the ISM Services on Thursday these three reports will give us a good read on May activity. The ISM Manufacturing Index is expected to be a solid 61.0 versus 60.7 in April indicating the manufacturing sector is expected to remain in strong expansionary territory which has been the case since last June. The April reading, however, came in weaker than expected at 60.7 when 65.0 was forecast but plenty of that was from of a lack of parts, namely chips for autos. With those shortages still weighing on the sector a sub-60 print could be possible but looking through those shortages the sector still seems very healthy.

3. May ISM Services Index—Thursday

After the ISM Manufacturing Index today, the ISM Services Index will try to impress investors on Thursday with an expected print of 63.3 versus 62.7 in April. It’s been obvious from the beginning of the pandemic that service businesses, those dealing in face-to-face transactions, have suffered the most in the last year but the time is coming for the services-side to begin rivaling the manufacturing sector with solid expansionary gains given the spreading vaccination rates.  If the May print comes as expected it will be just shy of the all-time high reading of 63.7 set in March.  That seems to suggest the services-side of the economy is coming back strong.

Source: Bloomberg

4. April Construction Spending—Tuesday

Construction spending has been all over the map so far in 2021 and to a certain extent, dealing with the vagaries of winter weather, that is to be expected. The housing market for one has seen a plateauing in new builds but that has more to do with sky-high lumber prices so it can’t all be blamed on the weather. For April, expectations are for construction spending to increase 0.5% month-over-month from the 0.2% gain in March. That gain came on the heels of an ugly –0.6% decline in February which was decidedly due to poor weather. With the summer months here, expect construction spending to post some solid gains in the months to come and should be a source of positive GDP contribution in the second and third quarters.

5. Initial Jobless Claims-Thursday

It’s time to check in on the weekly jobless claims numbers as they seem to be dipping down again which obviously bodes well for the labor market. Claims have now moved lower for four straight weeks with the latest claims figure of  406,000 the lowest since the pandemic hit. The expectation for claims this week is 385,000, the first 3-handle claims figure may be in our future. That bodes well for the May jobs report to bounce back from the disappointing April report.


 

Yield Universe

 

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Published: 06/01/21 Author: Thomas R. Fitzgerald