Analyzing the May Jobs Report: A Mixed Bag for the Labor Market

We are looking at the major US stock averages rallying this morning, and this does come on the heels of a better than expected non-farm payrolls number with non-farm payrolls increasing by 139,000 in May and the unemployment rate staying put at 4.2%.

Now private payrolls rose by just 37,000 in May, falling short of April 60,000 and expectations, according to ADP, this was the lowest monthly.

Since March 2023, wages grew at a steady 4.5% for current workers and 7% for those who change jobs.

Well, joining me on this Friday morning to weigh in is Steve Sosnick, chief strategist at Interactive Brokers.

Well, Steve, good morning.

Happy Friday.

We finally got that non-farm payrolls figure out and it was better than expected, but given all the other hard data that we have received, what do you make of the status of the labor market?

Uh, good morning, Remy.

The status, I, I'll say that it's kind of mixed and muddled, and that's OK.

Um, you know, we learned first of all that ADP remains at best an imperfect predictor of the non-farm payrolls number that usually comes two days later.

You know, the track record is good, but far from perfect, and this was another, this was another month where it was not necessarily a great predictor, and I was surprised to sort of see the market over, you know, overreact to ADP as it were.

You can see from the chart there the white line is ADP.

The blue line is, I'm sorry, yeah, the white line is ADP.

The blue line is not far payrolls.

I didn't have a chance to update it this morning.

I'm sorry, but we, but basically you could see that they don't always follow.

And they go, they move in different directions, and so I don't like to overreact to ADP as far as the numbers that are in front of us today.

They're, they're good enough, and I think that's why we're getting sort of a Goldilocks reaction from stocks.

Bonds don't like it because they are pretty good and you know, I think 139 there was a revision lower so it still kind of, I'm going to call it sort of a push, maybe a slightly weaker number, but not weak enough for the Fed to do anything.

We're certainly not going to move at 4.2% unemployment.

The other thing that's important to watch, there's monthly wage increases or labor costs, I'm sorry, were up 0.4% as opposed to a 0.3% expectation.

So the combination of higher wages and stable employment is not going to get the Fed off the sidelines.

That said, just before, just before we started talking, the president put on Truth Social that he wants the Fed to cut a full percentage point.

I don't know.

You know, I know he wants lower rates and was haranguing them that he's got 10 times and they've done nothing, but there's nothing here for the Fed to do.

So again, you see rates higher across the board, 22 year note rates, almost 10 basis points, but also the dollar is stronger.

So that sort of reverses the trend of money flowing out of the US.

In this case it's money flowing in because the rates look a little bit more favorable vis a vis their currencies, let's say against the yen, which is about 1% lower.

Yeah, and Steve, I'm glad that you mentioned that because as you and I are talking, we did that we did get that breaking news on Trump Trump pressing Powell for that full interest rate cut.

But I do want to zoom in on the bond market.

I know this is a major area of concern and that you watch the 2 to 10 spread like a hog and of course there's concerns about the US deficit.

So what impact do you think the budget bill will have on the national deficit?

And what are you watching when it comes to yields here?

Again, I'm keeping an eye closely on that spread and to see if the yield curve steepens.

If you see a meaningful steepening at the back end of the curve, 10s and 10s to 30s, that's telling us that foreigners are very skeptical about getting paid back in non.

Deflated dollars, you know, I think, you know, the US, I think there's very little danger of the US government not paying back its debt.

The question is, do you get it paid back in real terms or, you know, how much less than real terms do you get it paid back, and that would be reflected in the interest rate. right now today, most of them, there's a little more movement at the front end, meaning the and again I think people are focused more on the fact that the Fed is unlikely to move despite the haranguing because when I just before I came on air, the rate cut expectations for September were down to about 70%.

They were just two days ago they were looking for a full rate cut in September.

So I think that's, that's really the cause of the move, and I think that that relationship is very important because the budget.

You know, I can't.

I know that there's partisan arguing about what the Congressional Budget Office says, but bottom line is, you know, all the estimates both from the Congressional Budget Office and a lot of independent economists seem to indicate that there's a big deficit increase ingrained in this budget bill, and you know, there's been a lot of talk about cutting spending.

Honestly, there's two ways to cut a deficit.

One is cut spending.

One is raise revenues.

I don't know anybody in favor of higher taxes, but you know, the combination of adding tax cuts on top of revenue cuts, I'm sorry, spending cuts, it's a tough combination and does lead to deficit spending, and I think here, but we will have to wrap it up for today.

So thank you so much for joining me after this morning's jobs report, and I look forward to seeing you back at the exchange soon.

Thanks, Remy.