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US May nonfarm payrolls - hiring keeps taper on the table as labor shortage continues

-->US May nonfarm payrolls - hiring keeps taper on the table as labor shortage continues        
  • USD: US job growth averaging ~500K/month is likely to keep the Fed on a slow-and-steady path to taper toward the end of this year (Citi analysts). Rising wages and falling participation point to labor shortages - the US economy adds 559K total jobs in May and 492K in the private sector, below but close-to expectations (taking recent volatility into account). Wage growth is much stronger than expected once again, rising 0.5%MoM and 2.0%YoY (following April’s +0.7%MoM growth). The household report shows a 444K gain in employment but after two months of increased participation, 160K workers leave the labor force. The net effect is a drop in the unemployment rate to 5.8% from 6.1%.    

  • USD: Citi analysts Job growth continues to hover just above 500K on a three month moving-average, probably just strong enough for the Fed to continue to see the economy as making “good progress” (even if at a slower speed than expected a few months ago) toward recouping lost jobs. A more robust discussion of tapering is therefore still likely to happen at the June or July FOMC meeting and very likely at-or-before the late-August Jackson Hole conference. Job growth numbers will likely remain volatile with seasonal adjustment issues likely suggesting July may be a stronger month. While markets remain focused on the headline jobs number – the most interesting components in Citi analysts’ view are the rapid wage gains and stagnant participation that line-up with anecdotes suggesting rehiring has become more difficult. This dynamic, if sustained, would likely be supportive of more persistent inflationary pressure that the Fed may have to acknowledge later this year or early in 2022.        


Canadian May jobs report - employment declines ahead of likely strong June rebound             

  • CAD: Canadian employment declines by 68k jobs in May, a larger drop than consensus for -25k but closer to Citi at -80k. The unemployment rate rises slightly to 8.2% while participation rate falls to 64.6% and hourly wages of permanent employees are 1.4% lower than May 2020 due to compositional issues impacting wages last year. Citi analysts however, are not surprised by the overall decline in employment in May, as the reference period from mid-April to mid-May captures some continued activity restrictions in certain provinces. As more business are permitted to reopen, there should be a large bounce-back in employment beginning with the June report. Citi analysts still expect Canadian GDP in Q2 to rise overall, boosted by stronger activity in June, and with very strong growth seen in H2’2021.                    



Week Ahead                   

  • USD: US inflation indicators set to strengthen further - CPI MoM – Citi: 0.5%, median: 0.4%, prior: 0.8%; CPI YoY – Citi: 4.8%, median: 4.7%, prior: 4.2%; CPI ex Food, Energy MoM – Citi: 0.6%, median: 0.4%, prior: 0.9%; CPI ex Food, Energy YoY – Citi: 3.6%, median: 3.4%, prior: 3.0% - after a much stronger-than-expected 0.9% increase in core CPI last month, Citi analysts expect that many of the same factors pushing prices higher in April will persist in May and again result in a much stronger-than-average increase in core CPI of 0.57%MoM. Supply-shortage issues now appear to now be flowing through to consumer prices. As these price increases will still likely be dismissed by the Fed as temporary, the more important components of CPI to watch will continue to be key services components, such as shelter prices. These should continue to trend higher later in the year as movements pick up and given an already-strong housing market.  
  • USD: University of Michigan Consumer Sentiment – Citi: 84.8, median: 84.0, prior: 82.9; University of Michigan 1y Ahead Inflation Expectation – Citi: 4.4%, median: NA, prior: 4.6% - Citi analysts expect a renewed increase in the University of Michigan consumer sentiment index to 84.8 in June from 82.9 in May as virus cases decline and activity patterns normalize. The most important aspect of the University of Michigan survey are higher inflation expectations for both the one-year-ahead and five- to ten-years-ahead measures. The five- to ten-year measure, in particular, will be important for the outlook for Fed policy, and a continued climb higher into the end of the year would be a sign of more persistent price pressures lasting into 2022.
  • EUR: ECB Monetary Policy Meeting Forecast: No Change – Citi analysts expect the Governing Council will choose to maintain its current pace of purchases under PEPP at a net amount of approximately EUR 80bn per month, and avoid conveying any specific message on what happens afterwards, either before or after March 2022 (the end-date of PEPP by default).   
  • CAD: BoC Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts do not expect any change in policy at the BoC meeting on June 9, with the pace of QE purchases remaining at C$3 billion per week after the reduction at the April meeting. Language around inflation should be updated to acknowledge the above-target 3.4% headline CPI, though looked through by the BoC. More interesting could be any acknowledgement of core inflation measures returning to the 2% target as the latest estimates now show the output gap closing in H2-2022. Citi analysts’ base case remains that the next reduction in asset purchases will occur in July.
  • CNH: China Exports (%YoY) May: Citi 30.0, Consensus 32.1, Previous 32.3; Imports (%YoY): Citi 49.0, Consensus 55.0, Previous 43.1; Trade Balance (US$bn): Citi 55.0, Consensus 48.5, Previous 42.9 – China’s export growth is likely to remain robust in May. While survey based indicators suggest trade may have slowed, some initial hard trade related data points still indicate robust trade activity. Together with a low base last year (-3.5%YoY), Citi analysts expect export growth to stay robust at 30% in May versus 32.2%YoY in April. Meanwhile, with commodity and energy prices elevated in May, combined with a low base last year, should see import growth accelerate to 49%YoY. Based on such forecasts, Citi analysts estimate the trade surplus to come in at US$55bn in May.  


This is an extract from the Daily Currency Update, dated June 7, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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