The US job market seems to be losing momentum, but it is still resilient enough and is likely to help the Federal Reserve achieve a so-called “soft landing” in the second half of this year.

At 20:30 Beijing time on Friday, the US Bureau of Labor Statistics will release non-farm payrolls data for May. The market expects this report to show signs of further cooling of the US labor market. Previously released data on “small farmers” and challenger companies, as well as the US Department of Labor's latest job vacancies and labor mobility survey reports, all confirmed this, but they did not trigger a wider decline in recruitment. If the latter occurs, this may increase people's concerns about the world's largest economy and ignite market bets that the Federal Reserve may cut interest rates as early as July.

Economists expect the number of non-farm payrolls in the US to increase by 185,000 in May, a slight increase from 175,000 in April; the unemployment rate remained the same as last month, at 3.9%. Furthermore, the average hourly wage is expected to increase by 0.3%, a slight increase from the previous month, reaching a year-on-year increase of 3.9%, or the same as last month, which indicates that the Federal Reserve still has more work to do.

For the Federal Reserve, it hopes to see employment growth fall to 150,000 or even 100,000 per month to ease the tight labor market and ease upward pressure on inflation.

Is the focus of the market beginning to shift from inflation to the labor market?

Regarding this non-farm payroll report, the market question is whether the slowdown in non-farm payroll growth is a sign of labor market normalization or an early sign of a broader economic slowdown. Currently, economists believe Friday's data will support the former.

Bank of America economist Michael Gapen wrote in a research report, “May's non-farm payrolls data may show a healthy and more balanced labor market. Furthermore, the report may provide evidence that the 'catch-up' effect on recruitment is fading. Whether the Federal Reserve can relax its policy this year will depend on its confidence in inflation.”

Overall, other data released this week showed that the labor market is still resilient, and there are further signs that the US labor market is returning to pre-COVID-19 levels. Job vacancies in April fell to their lowest level since February 2021, according to JOLTS data released on Tuesday.

Notably, the ratio of the number of job vacancies to the number of unemployed people returned to 1.2 in May, in line with pre-COVID-19 levels.

The payroll data released on Friday will be closely watched as continued high wage growth could lead to sticky inflation. In April of this year, the year-on-year wage increase fell below 4% for the first time in nearly three years. Economists expect wage growth to accelerate slightly to 0.3% in May, up from 0.2% in April, and remain at 3.9% year on year.

Ian Shepherdson of the Pantheon Institute of Macroeconomics said, “We estimate that the number of seasonally adjusted layoffs increased by about 10% last month, and the three-month average still indicates that the number of initial jobless claims will increase dramatically in the future.”

He added, “If, as we expect, the number of layoffs increases while the reduction in recruitment also curbs the number of jobs, then the weak labor market will soon become a bigger problem facing the Federal Reserve and the market.”

Chris Zaccarelli, chief investment officer of the Independent Advisors Alliance (Independent Advisor Alliance), also pointed out that the market is undergoing a so-called “subtle shift” from focusing on inflation data to worrying about the job market. He said:

“Ironically, a slowdown in the job market, and even a rise in unemployment, should be welcomed, as it mitigates upward pressure on inflation to a certain extent, and we agree that this is the most noteworthy thing. But we are aware that a weak labor market and economy may ultimately pose a greater threat to the market than the inflation rate (1-2% above the Federal Reserve's target).”

The Atlanta Federal Reserve's GDPNow model predicts that the US economy will grow at 2.6% this quarter, a sharp drop from the previous forecast, but it is still double the 1.3% growth rate in the first quarter.

It is worth noting that if the US unemployment rate for May, as announced today, actually remains below 4%, it will be “the longest time since the early 1950s that the unemployment rate has remained below 4%.” As long as the unemployment rate remains low, the US is likely to avoid recession. Since World War II, every time America has fallen into recession, the unemployment rate has exceeded 5%.

Deutsche Bank analysts pointed out that in the late 1960s, the US unemployment rate fell below 4% for 27 consecutive months; while it fell below 4% for 28 months or more in the early 1950s (35 months). “If tonight's situation is going to be similar to the early 50s, then we still have a lot of room for optimism. In particular, low unemployment is often a stimulus to productivity growth, as companies find it more difficult to recruit workers and focus more on helping existing workers be more productive. Considering the development of artificial intelligence in our time, this suggests that economic growth in the next few years is likely to have some upside risks. ”

Are interest rate cuts expected to be “rubbish” in July?

At the time the report was released, the US stock market once again reached a record high. A series of weaker-than-expected economic data strengthened investors' confidence that the Federal Reserve might cut interest rates starting in September. According to the CME Fed Watch Tool, the market expects the possibility that the Fed will cut interest rates in September to be 67%, up from about 50% a week ago.

Any figure above 175,000 may cause the Federal Reserve to suspend interest rate cuts, but if employment growth falls below 150,000 and the May report shows signs of weakness in the labor market, investors may advance the expected date for the Fed to cut interest rates to July. Citi and Xiaomo hold this view.

Citi expects the US to add only 140,000 jobs in May, and the unemployment rate will reach 4% for the first time since January 2022. If this expectation comes true, it may give the Fed an incentive to cut interest rates earlier.

The market currently believes that the Federal Reserve will cut interest rates for the first time in September, and will cut interest rates once more in December. Citi's view of the US labor market falls short of market consensus, and its view on cutting interest rates also deviates the most from the general view on Wall Street so far. The bank expects the Federal Reserve to cut interest rates starting in July and continue to cut interest rates four times until the end of the year. Citigroup economist Andrew Hollenhorst said in a report:

“The May jobs report is particularly important right now. Weak data (less than 175,000 jobs and an unemployment rate of 4% or more) will be the last evidence that the economy will continue to slow. On the other hand, the unexpected strengthening will reinforce the view that the Fed is not in a hurry to cut interest rates and make US bond yields higher again.”

Goldman Sachs expects the number of employed people to increase by 160,000, which is lower than market expectations, because it believes that seasonal adjustments are inhibiting employment growth. On the wage issue, Goldman Sachs's views are basically the same as market consensus, believing that wage increases remain at a level that is not in line with the 2% inflation target as stated by Federal Reserve officials. Goldman Sachs expects the Federal Reserve to start cutting interest rates in September.

However, next week's two major events may also cause the market's expectations of interest rate cuts to fluctuate sharply, including the US CPI data for May and the Fed's interest rate meeting in June. This meeting will also announce new growth and inflation forecasts. These predictions are likely to include major adjustments to interest rate prospects.

If the labor market slows down and inflationary pressure eases, interest rate cuts by the Bank of Canada and the European Central Bank this week may provide sufficient opportunities for the Federal Reserve to guide the market and plan to cut interest rates in the fall.

Is the path of least resistance for gold still upward?

On Thursday, gold hit a new two-week high and stood above the $2,370 mark. Regarding the gold market, analyst Haresh Menghani said that supported by the upcoming weakening of US macro data, more and more people are betting that the Federal Reserve will cut interest rates in September, which may continue to be the driving force for gold prices. Moderate Federal Reserve expectations kept US Treasury yields and the dollar near multi-week lows, which should further limit the downside of gold prices. In addition, the geopolitical tension caused by the Middle East conflict shows that the path of least resistance for gold is upward.

FXStreet analysts believe that if the non-farm payrolls report released tonight falls short of expectations, there will be no suspense; strong employment reports may provide bullish momentum for the dollar, but after the dust settles, speculative interest may sell it off, and gold is still likely to rise.

Technically, if gold strengthens further, its next resistance level will be the $2,400 integer mark, followed by the highest point of $2,450 so far this year.

Conversely, if gold falls below $2,350, the next support level will be the 50-day simple moving average of $2,337, followed by the May 8 low of $2303. If it still falls below this level, the next support will be the May 3 cycle low, or $2,277.

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