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05 06 2016 | by Victor Xing | Capital Markets

April Payrolls and the “Dudley surprise”

April Payrolls and President Dudley’s hawkish comments

With the highly anticipated June FOMC less than 6 weeks away, investors are scrutinizing every Payrolls report, inflation data, GDP reading, as well as consumer spending measures to assess upcoming Fed policy decisions.  Today’s April Payrolls is the crown jewel of this month’s data, and the below-consensus reading at 160,000 vs. 200,000 survey spurred an immediate rally in front-end and belly of the Treasury curve.

The strength was short-lived, however, as the curve subsequently bear-steepened on rising inflation expectations from the slightly above-consensus AHE at 0.31% MoM and WTI crude futures near $45/bbl.  The policy surprise came later in the day, when New York Fed President Dudley commented that expectations of two fed rate hikes in 2016 are “reasonable” (market had priced about half of a hike following data before capitulating to 3/4 of a hike post-Dudley).

Taking today’s data as a whole, “guts” of the Payrolls report revealed conflicting readings on overall labor market conditions amid claims that “it is the weather.”

  • NFP at 160,000 vs. 200,000 consensus and 208,000 prior (revised down from 215,000)
  • Prior two month revision at -19,000
  • U3 unemployment rate unchanged at 5.0%, U6 unemployment rate at 9.7 vs. 9.8 prior (please see Chart 1)
  • Involuntary part-time workers as a percent of labor force at 3.75 vs. 3.84 prior (please see Chart 1)
  • Average hourly earnings at 0.31% MoM vs. 0.3% consensus.  YoY reading at 2.49% (please see Chart 2)
  • Headline labor force participation at 62.8% vs. 63.0% prior, prime age participation at 81.2% vs. 81.4% prior (please see Chart 3)
  • Long-term unemployed at 25.7% vs. 27.6% prior (please see Chart 4)
  • Notable changes in employment sectors (please see Chart 5):
    • Professional and business services at 65,000 vs. 37,000 prior
    • Education and health services at 54,000 vs. 43,000 prior
    • Manufacturing surprisingly turned a corner at 4,000 vs. -29,000 prior
    • Trade, transportation and utilities at 8,000 vs. 53,000 prior
    • Job losses led by “mining and logging” at -8,000 vs. -12,000 prior, and construction job growth cooled at 1,000 vs. 41,000 prior (a significant driver behind the downside surprise)

Chart 1: U3, U6, involuntary part-time workers

April Payrolls
U3, U6, part-time workers for economic reasons; source: Bureau of Labor Statistics

Chart 2: Average hourly earnings

April Payrolls
Average hourly earnings; source: Bureau of Labor Statistics

Chart 3: Labor force participation rate

April Payrolls
Both prime age and headline labor force participation inched down

Chart 4: Long-term unemployed as a percent of total unemployed

April Payrolls
Long-term unemployed as a percent of total unemployed

Chart 5: Major payroll sectors

April Payrolls
Major sectors within the Payrolls report

Policy implications and market reactions

Similar to financial market participants, Fed policymakers too are “watchful waiting” on tier 1 data.  At yesterday’s Hoover Fed Conference (May 5th), Atlanta Fed President remarked that he was “on the fence” with a June rate hike, and Dallas Fed President Kaplan voiced support for a rate hike in the summer if “economy picks up.”  Nevertheless, today’s Dudley comment supersedes prior Fed communication, as the two hike scenario is still far more aggressive than market expectations.

In his memoir “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” Ben Bernanke illustrated frequent interaction and consensus building between the Fed Chair and Governors of the Board, as well as strong influences by the New York Fed President.  In contrast, regional Federal Reserve Presidents were often not in the loop, and they were seen as outside of the Fed Chair’s “inner circle.”

Financial markets reacted largely as expected – the 5s30s curve reversed the steepening with sell-off led by the belly.  Dollar index rebounded (stronger dollar, if persisted, will weigh on global funding conditions), and rate hike expectations rose.

Until Yellen, Fischer, Brainard, Powell or Tarullo speaks, Dudley’s policy view should dominate market sentiment.

April Payrolls
Dollar index rallied out of an initial decline before strengthening further on President Dudley’s comments
April Payrolls
5 year FV (blue) vs. 30 year WN UST futures (orange)
April Payrolls
Jan 2017 Fed funds futures priced in 3/4 hike for the rest of the year (vs. 0.5 pre-Dudley)


Next article05 04 2016 | by Victor Xing | Economics

Strong April ISM NMI offset below-consensus ADP