Monetary Policy & Inflation | US
A Good NFP for the Fed
- By Dominique Dwor-Frecaut
- 3 min read
I expected a downside surprise on NFP, but not one so big: 266,000 against 1mn expected. Surprises of this magnitude are typically noisy, as was this – the difference between NFP and total employment is at the upper end of the range, both MoM and YoY. The NFP data will probably see an upward revision, though the surprise is so large that it will likely remain negative, and substantial.
Contrary to my expectations of a 10bp increase, participation rose by 20bp. But only men’s participation went up. Women’s was unchanged, likely reflecting the administration’s limited success in reopening schools and day care centres (Chart 1).
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- As I expected, NFP surprised on the negative side largely due to a lack of available labour. This was shown by an increase in hours worked and a higher wage increase than I expected.
- The men’s participation increase was on the upper end of the historical range. Yet women’s participation was unchanged, suggesting reopening schools could be more important for labour supply than cutting unemployment benefits.
- This is a good NFP for the Fed as it justifies their very loose policy. Faster wage growth is unlikely to concern them since it will be offset by higher productivity and they will probably consider it temporary.
Market Implications
- Positive for equities and bonds largely due to a taper announcement likely to be delayed from September to December.
School Closures Constrain Participation
I expected a downside surprise on NFP, but not one so big: 266,000 against 1mn expected. Surprises of this magnitude are typically noisy, as was this – the difference between NFP and total employment is at the upper end of the range, both MoM and YoY. The NFP data will probably see an upward revision, though the surprise is so large that it will likely remain negative, and substantial.
Contrary to my expectations of a 10bp increase, participation rose by 20bp. But only men’s participation went up. Women’s was unchanged, likely reflecting the administration’s limited success in reopening schools and day care centres (Chart 1).
Labour Supply Is the Main Constraining Factor
Labour supply is much more likely to explain the poor NFP rather than labour demand. A further increase in average weekly hours and wages supports the supply constraint narrative. April’s increase in hours worked likely reflects the labour supply constraint becoming more intense. Also, it suggests an increase in productivity per worker.
Hourly earnings surprised on the upside at 0.3% YoY against -0.4% expected. This is high considering the bulk of the increase in NFP was in the lower-paid leisure and hospitality sector. Employers are raising wages by more than I expected, though higher productivity will likely offset the impact on business costs.
A Good NFP for the Fed
I believe the labour supply constraint delays the recovery but does not threaten it. Friday’s data will pressure state governors and the administration to press on with school re-openings against the backdrop of the 2022 mid-terms, which will be largely fought on the policy response to the pandemic. Labour supply constraints will probably ease in autumn once schools fully re-open.
The ending of supplementary benefits in September could also help, though it seems less important than school re-openings. Regardless, incremental scarring risks from a lack of labour supply appear limited when set against the massive fiscal and monetary stimulus injected into the economy.
For the Fed, the NFP is a good number. It justifies the enormous stimulus applied to the economy and a very cautious approach to withdrawing it. Also, the Fed will likely take the wage increase in their stride and could even signal that an increase in workers’ share of income would be positive for the recovery.
Market Consequences
The market reaction supports the TINA narrative, i.e., mediocre growth and inflation, strong Fed put, and limited investment alternatives. The SPX was up, despite a delayed recovery likely implying slower earnings growth this year. This reaction suggests market participants see Fed support as more important than economic fundamentals. Because the economic backdrop remains that of TINA, I expect investors to continue buying stocks – if less enthusiastically.
10-year breakevens were up about 4bp and nominal yields unchanged on the day. I believe that market expectations of higher long-term inflation will likely see disappointment. In particular, views that higher wages are necessary to increase labour supply miss the importance of schools and day care centres for women’s participation. Also, my view that the taper announcement will likely be pushed back to December suggests lower nominal yields in the short run. Friday’s NFP does not change my view on the risk of a bond selloff in autumn.
Please note, that this article is a shortened version of a research note available on macrohive.com. If you are interested in finding out more about our Macro Hive Professional offering, please contact us here.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)