The stock market will face month-/quarter-end window dressing as well as key US economic data this week. The seasonal selling at this time appears to have occurred earlier than usual, so this "technical" factor will probably be a non-event this week. While the markets and news reports focus on inflation data as critical for Fed policy, this is not correct, as the Fed leadership firmly believes currently high inflation prints will be transitory. What is more important is the Employment Report, as these officials appear to be committed to eliminating the labor market slack that resulted from the pandemic. From this perspective, the June Employment Report is not likely to stand in the way of a strong earnings season this summer.
The most important part of the June Employment Report, consequently, is the Unemployment Rate. And, not only the overall Rate but the various sub-measures, as well. Fed officials have stressed their desire for all groups to experience labor market improvement. Their goal is not likely to have been achieved in June. The consensus estimate of a 0.1% pt m/m decline in the Rate to 5.7% from 5.8% would leave a large 2.0% pts needing to be eliminated in coming months (see table below). So, a near-consensus +675k jump in Nonfarm Payrolls would not likely be enough to unsettle the Fed's commitment to steady easy policy.
Besides the overall Unemployment Rate, Fed officials have underscored their goal to achieve a broad reduction in labor market slack. As of May, the only major sub-group that has made up the lost ground over the pandemic was Teen-Agers. Perhaps their success in getting jobs stems from the absence of adults who stayed unemployed in order to receive the supplemental benefits. With many states having stopped these benefits, and Continuing Claims beginning to fall sharply, adult unemployment should fall while the Teen-Age Rate may move back up.
Unemployment Rate and Sub-Measures Versus Pre-Pandemic Lows (level, percent)
May 2021 February 2020
Total 5.8 3.5
Adult Male 5.9 3.2
Adult Female 5.4 3.1
Teen-Age 9.6 11.5
Black 9.1 6.0
Latino 7.3 4.4
There are some downside risks to the +675k consensus estimate of June Payrolls. This is because the recent surge in Leisure and Hospitality jobs may slow, as was the case in this component of May Consumer Spending. A slowdown in this jobs segment would offset speedups elsewhere, the latter suggested by the Claims data.
Other parts of the Employment Report could provide important evidence on whether economic growth will slow on a q/q basis in Q321. In particular, if the Nonfarm Average Workweek pulls back from its very high 34.9 Hour level, Total Hours Worked could be subdued even with a large Payroll gain. The June level of THW will indicate the take-off point for the subsequent quarter. While consensus looks for a steady Workweek, there is no reliable evidence on which to base a forecast.
Consensus looks for a slowdown in Average Hourly Earnings to 0.3% m/m from 0.5% in May. The market should take comfort if this estimate turns out to be right, as it would suggest labor cost inflation is not accelerating. It is still above the 0.1-0.2% trend seen pre-pandemic, however.
Other US economic data this week should have little market impact. Consensus looks for little change in the June Mfg ISM from 61.2 in May. Other manufacturing surveys have been mixed, but all show a still strong sector. Consensus expects a speedup in May Construction Spending to +0.4% m/m from +0.2% in April. The stoppage of the "Border Wall" in Texas has weighed on this Spending in recent months.
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