Will June nonfarm payrolls cool enough for Fed’s liking?

The U.S. economy is expected to add fewer jobs in June vs. May but still stay at a relatively strong level. Federal Reserve policymakers will parse the nonfarm payrolls report, due out on Friday, as they seek to lower inflation by slowing demand via interest-rate hikes.

Economists expect that 225K jobs were added in June, down from the 339K increase in March, and trailing the six-month average of 314K. For some context, May’s figure represented the second-strongest month for job creation so far this year.

A cooldown in job gains in June “feels inevitable,” said Aaron Terrazas, chief economist at Glassdoor, “though job growth is likely to remain above the 200,000 monthly benchmark that has historically been consistent with an expanding economy.”

Fed chief Jerome Powell made plain last month that the central bank’s inflation fight has yet to be resolved, as “this economy is very strong, and what’s driving it is a very strong labor market.” As such, it will take “some softening of the labor market for inflation to come down” closer to the Fed’s 2% inflation goal.

Despite the Fed’s resolve to squash inflation, having jacked up its benchmark rate to a target range of 5.0%-5.25% from near-zero over a year ago, a slew of data this week has pointed to a tight labor market. Thursday’s ADP report showed an unexpectedly large advance in the number of jobs added, and the Challenger Job Cuts Report signaled a sizable drop in job cuts. There were some outliers, however, as the job openings fell more than expected and continuing jobless claims slid.

A cooldown in job gains in June “feels inevitable,” said Aaron Terrazas, chief economist at Glassdoor, “though job growth is likely to remain above the 200,000 monthly benchmark that has historically been consistent with an expanding economy.”

Terrazas reckons the June’s jobless rate edged up for a second straight month to 3.9%, citing “the entry of recent college graduates to the jobs market, and slowing reemployment among workers who were recently laid off.” Economists, though, see the rate of unemployment holding steady at 3.7%.

Aside from the lingering labor shortage, the Fed will also keep an eye on wage growth. Average hourly earnings are expected to rise 0.3% M/M in June, unchanged from the prior month. On a Y/Y basis, AHE is seen ticking ticking down to 4.2% from 4.3%. Terrazas expects the annual pace of wage growth to come in at 4.1%, in what would be “a welcome trend but hardly sufficient to erase fears of wages fueling persistent inflation.”

How will financial markets react? Any significant deviation from consensus estimates “could cause considerable volatility in stocks and bonds,” Andrew Hecht, Investing Group Leader of ‘Hecht Commodity Report,’ told Seeking Alpha in an emailed statement.

A lower-than-expected reading could drive a “substantial rally” that “leads to new local highs,” said SA analyst Christopher Robb. “But for there to be a major selloff tomorrow, I think what would be needed would be a miss that is way outside of expected numbers like that which occurred in the ADP report, which is possible but necessarily likely.”

Eric Basmajian, Investing Group Leader of ‘EPB Macro Research,’ advised the importance of dividing the labor market report into three segments: cyclical economy, total economy and non-cyclical economy. That, in turn, “can provide more informative insights about the economy’s underlying trends and potential recessionary conditions.”

The headline number of the NFP report, he added, “will offer virtually nothing in terms of information about the future direction of the economy nor the current underlying trends, which always proliferate through the Cyclical or interest-rate sensitive sectors first.”

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