Three things to watch for in the April NFP report

It’s a risk on day as we wait for payrolls, scheduled for release at 1330 BST. European markets have opened higher, the dollar is lower on a broad basis and US government bond yields are also down, the 10-year yield has fallen 6 basis points since the Fed meeting on Wednesday, the 2-year yield is lower by 15 basis points since the Fed meeting. While it is true that the Fed meeting was less hawkish than anticipated, the price action in its aftermath suggest that the market had over-egged the prospect of a rate hike and pared back expectations for rate cuts too far. However, the payrolls report is a key part of the puzzle for the Fed, and April’s report will be important to determine the timing of the first cut. Below, we look at three things to watch out for in today’s US labour market report.

1, The market is expecting a ‘weak’

The market is forecasting the number of payrolls created in the US economy to be 240,000, which would be the weakest rate of growth since November. Earlier indicators of jobs growth in the US have been mixed. For example, the ADP report of private sector payrolls was 192k for April, slightly above expectations but still below 200k, which suggests expansion. Jolts job openings was also weaker than expected at 8.4mn, vs. 8.8mn in March, this is the lowest number of openings since 2021, which may be a tentative sign that job opening figures are returning to normal. Unsurprisingly, the bulk of job openings remain in education and healthcare, leisure and hospitality and in information. These service level jobs continue to drive payrolls, so it is worth watching these sectors in today’s payrolls report to see if there is any slowdown in the pace of service sector employment. Until that happens, we don’t see the Fed cutting rates.

2, Wage growth

Average hourly earnings data is where the labour market and inflation data collide, so it has special focus for the Fed and thus the market, even if average earnings data is a strange figure that can disguise weaker trends in wage growth if higher earners continue to see wages grow.

Average hourly earnings are expected to grow by 0.3% in the month and by a 4% annual rate, down from 4.1% in March. A figure weaker than this could cheer the market, and drive risk sentiment as we end the week. However, the market seems very eager for this outcome, so if today’s earnings data is hotter than expected, we could see risk sell off.

Ultimately, the labour market determines the trajectory of inflation. Wages will not slow until the rate of jobs growth slows. This is why we are also watching the employment components of the ISM surveys closely. The April Manufacturing ISM employment component was 48.6, in contraction territory. Manufacturing employment growth was flat last month, so all eyes will be on the ISM service sector employment component, which will be released after the NFP report on Friday. The market is also looking for a reading of 49, up from 48.5 in March, but still in contraction territory. These surveys could suggest labour market weakness down the line.

Looking ahead, as AI is embedded into the US economy, we can see growth rise sharply but employment levels remain subdued. Thus, a weak employment picture in the future does not necessarily bode ill for growth, which may prove to be the next headache for the Fed.

3, Expect wild swings in the market in the aftermath of this report

Unless the data comes in exactly in line with analyst estimates, there could be some big swings in stock markets in the aftermath of the NFP report. The options market is pricing in a move of 1.2% in either direction on the back of this NFP report. This would be the largest daily swing for more than 2 months, so expect fireworks this afternoon.