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Still strong US May jobs report and ISM services

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USD: US jobs rise by 390k in May, stronger than consensus expectations for 318k and Citi at 315k and the unemployment rate remains at 3.6% as a drop in employment in the household survey in April reverses in May alongside a modest uptick in the participation rate. But the most potentially dovish takeaway from the report is the weaker than expected 0.3%MoM increase in average hourly earnings (AHE) (versus consensus and Citi expectations for +0.4%) with the Y/Y dropping to 5.2% from 5.6% prior. The May jobs report seems to find a balance between slowing wage pressure, rapid labor force growth, unchanged unemployment levels and details signaling healthy shifts below the top level. With 390K jobs added in May, it is not a slouch on the top line, but the 331K increase in private jobs is the slowest since April 2021.
 
USD: That said, employment data over the last few months shows a still solid US labor market despite a much more hawkish Fed attempting to dampen demand while revealing a somewhat less-tight labor market than expected this month, with the unemployment rate unchanged and average hourly earnings somewhat softer. The May employment report could theoretically make the Fed somewhat optimistic that inflationary pressures are at least not continuing to build. However, such a shift in the Fed’s stance looks unlikely in the short term as signaled by the hawkish comments from Fed President Mester following the jobs report (backing a series of 50bp Fed hikes until at least the September meeting) and the reaction from markets as UST yields subsequently track higher following the jobs data. 
 
USD: US ISM services still solid despite dip - ISM services index falls modestly to 55.9 in May from 57.1 in April, fairly close to consensus expectations for 56.5 and Citi at 56.4. The business activity index declines to 54.5 but the new orders index rises to 57.6 and the employment component moves just back into expansionary territory at 50.2. The price paid index though drops a touch (complementing the lower than consensus rise in average hourly earnings in the May payrolls data) to 82.1 but is still close to record highs while the supplier delivery index drops to 61.3, but this is still indicative of slowing supply chains. The ISM services index continues to be in expansionary territory – while below the peak levels set last year in the aftermath of the COVID-19 reopening, there are yet no obvious warning signals being flashed in this data. Much like the ISM manufacturing report released earlier last week, metrics remain positive on demand while supply chain disruptions remain entrenched.
 

Week Ahead

USD: US May CPI MoM – Citi: 0.8%, median: 0.7%, prior: 0.3%, CPI YoY – Citi: 8.3%, median: 8.3%, prior: 8.3%; CPI ex Food, Energy MoM – Citi: 0.5%, median: 0.5%, prior: 0.6%, CPI ex Food, Energy YoY – Citi: 5.9%, median: 5.9%, prior: 6.2% - Citi analysts expect another strong increase in core consumer prices in May, with core CPI rising 0.47%MoM and headline CPI rising an even stronger 0.8% with both food and energy prices continuing to rise. Core goods prices should rise a solid ~0.4%MoM, a stronger increase than over the last two months as recent declines in used car prices should stabilize. Services prices have also recently been picking up even excluding shelter and transportation services. This is likely related to tight labor markets pushing wages higher.
 
USD: US June (preliminary) University of Michigan Consumer Sentiment – Citi: 59.2, median: 58.4, prior: 58.4, 1yr Inflation Expectation – Citi: 5.4%, median: NA, prior: 5.3% - Citi analysts expect a modest increase in the University of Michigan consumer sentiment index despite expectations for the 1Yr inflation expectations measure to rise again back to 5.4% after a decline in May. Both the 1-year and 5-10Yr inflation expectations measures in the survey will continue to be very important for market expectations for the path of Fed policy. These have stabilized recently but with upside risks – 1Yr inflation expectations could rise further with still-rising retail gas prices while the longer-term measure could still follow short-term expectations higher.
 
EUR: ECB: clearance for lift-off – Citi analysts expect the ECB to terminate net asset purchases in June and hike interest rates by 25bp in July, September and December 2022 as well as March 2023 -ECB Deposit Facility Rate -0.5%, Previous -0.5%; ECB End of Net Asset Purchases 30 Jun, Previous Q3
 
AUD: June RBA Monetary Policy Decision: Citi forecast; +25bps to 0.60% Previous; +25bps to 0.35% - since the May monetary policy meeting when the RBA began its tightening cycle, economic data has broadly been in-line with the Bank’s forecasts. Consequently, Citi analysts stick to their view of another 25bps rate hike this week though market economists’ forecasts sees a large range on the size of the rate hike, ranging from 25bps, 40bps and 50bps. Indeed, risks this week are clearly tilted towards a higher quantum of rate hikes, say 40bps or 50bps. These options will likely be considered but more likely to occur if the RBA feels it is behind the curve and needs to catch-up. However, Citi analysts still believe a gradual hiking cycle is the least disruptive to households, particularly when the RBA meets every month, unlike other global central banks that meet less regularly, and have gone down the path of 50bps increase in an attempt to blunt inflation. Moreover, risks of a larger than 25bps rate hikes around key events such as the FWC’s (Fair Work Commission’s decision on wages) decision in July, and the Q2 CPI in late July make the month of August more likely to see a 50bps rate hike.
 
CAD: Canada Net Change in Employment (May) – Citi: 35k, median: 25k, prior: 15.3k, Unemployment Rate – Citi: 5.3%, median: 5.2%, prior: 5.2%, Hourly Wage Rate Permanent Employees – Citi: 4.0%, median: 3.8%, prior: 3.4% - Citi analysts expect a 35k increase in Canadian employment in May, a slightly stronger increase than the 15k increase in April but consistent with a typical pre-pandemic monthly pace. Still, as the BoC continues to indicate, labor demand overall remains strong and a limited supply of workers should start to limit the monthly pace of hiring. Citi analysts expect average job growth of around 20-40k over the coming months, in line with the pre-COVID pace but with likely greater month-to-month volatility. Citi analysts will also be closely watching wage growth over the coming months as despite strength in survey indicators of wage plans and the most recent wage data in the payrolls survey, there still does not seem to be signs of abnormally strong wage growth in the monthly labor force survey. An even clearer acceleration in wages could keep BoC more hawkish into H2’2022.