Strong Job Growth Continues While Wage Gains Moderate

  • Nonfarm payrolls increased 390 thousand in May with those gains fairly  widespread. Expectations were for 318 thousand jobs and the increase was just below April’s 436 thousand new jobs. The largest gains came in leisure and hospitality, in professional and business services, and transportation and warehousing. Total nonfarm payrolls are closing in on pre-pandemic levels, now just 822 thousand below February 2020. Unsurprisingly, leisure and hospitality leads the deficit with 1.3 million less jobs than in February 2020.

 

  • The most watched indicator in this report involve wage growth given the focus on inflation.  In this regard, the report reflected a continuing moderation that started in April. Average hourly earnings rose 0.3% for the month, missing the 0.4% expectation but matching April’s gain. The year-over-year pace of wage gains matched expectations at 5.2%, down three-tenths from April’s 5.5% increase. In all, wage gains remain historically above average but for a second straight month there wasn’t an acceleration of gains. In summary, a wage spiral is not happening.

 

  • One indicator the Fed will like, but is hoping for more, is the one-tenth increase in the Labor Force Participation Rate. It increased from 62.2% to 62.3% as 330 thousand people entered the labor force. Job openings remain high at 11.4 million which is nearly twice the level of unemployed persons. One way to fill those open positions and loosen the tightness in the labor market is to get more people off the sidelines and back into the labor force. There is still more work to be done here as the pre-pandemic participation level was 63.4%.

 

  • The unemployment rate remained at 3.6% for a third straight month, missing the 3.5% expectation, as the number of unemployed was essentially unchanged at 5.95 million. This level is little different than the February 2020 value.

 

  • It remains a bit of a mystery that with wage gains at historically strong levels, and with job openings near all-time highs, we didn’t see a more significant increase in the labor force and a bigger decrease in the unemployed. It’s the second straight month where this is the case and could get some talk going that a more dramatic improvement in the labor force participation rate is just not in the cards due to pandemic influences. If so, that means labor market tightness could remain in place which could result in another lift in wages down the road but it’s not evident in this report.

 

  • In all, this is close to a Goldilocks report with strong job gains coupled with moderate (i.e., not spiking) wage gains. This report will definitely keep the Fed’s 50bps rate hikes for the next two meetings on track. It is, however, ambivalent enough to keep the question of 25bps or 50bps at the September meeting an open question.

 

  • Treasuries are selling off on the report as the headline beat, and still solid wage growth, indicate no slowing in the labor market in May. The 10yr Treasury is currently yielding 2.97% as it tries to revisit the land of the 3-handle yield.

 

Average Hourly Earnings (YoY)

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.69 2.94 3.06 3.24 3.50 3.96
0.50 2.68 2.91 3.00 3.13 3.36 3.85
1.00 2.67 2.88 2.97 3.09 3.27 3.72
2.00 2.86 2.91 3.01 3.15 NA
3.00 2.96 3.09 NA
4.00 3.04 NA
5.00 3.00 NA
10.00 NA

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Published: 06/03/22 Author: Thomas R. Fitzgerald