We expect headline job gains cooled to 100k in May against current consensus of 125k. We also expect unemployment rate rounded off to 4.3% in May as measures of job losses have begun to pick up from historically low levels, while indicators of labor demand have ticked down after stabilizing in 2024. One item is continuing jobless claims, which have recently hit new cycle highs, raising the risk that the unemployment rate could start to edge up from the narrow range it has been in since the middle of last year. The rise in claims is consistent with household data, where the composition of transitions out of employment has been gradually shifting to more layoffs than quits lately . The ratio of those experiencing layoffs to quits hit its highest level in four years in March and stayed there, partly also due to historically low quits. Another concerning sign for the labor market came from the Conference Board’s consumer confidence report. The labor market differential, which measures perceived job availability, has been gradually declining since January and is now just barely above the cycle low from last September. We expect average hourly earnings (AHE) growth ticked higher to 0.3% in May due to positive calendar effect for earnings growth in May. Despite a worsening growth outlook, we expect Fed officials to continue to prioritize inflation risks. Policymakers have noted that trend job gains are likely to slow. Consequently, it seems unlikely they would overreact to headline NFP in the low-100s or even high double-digits. Forward-looking risks to the labor market are skewed to the downside, but with the unemployment rate remaining stable and few signs of widespread layoffs, policymakers are unlikely to become concerned about an imminent deterioration. We continue to believe in 2 rate cuts in REMCY25 with Sep being the most likely 1st cut of 25 bps and another in Dec’25. By that time unemployment rate might have jumped northward of 4.5% forcing Fed to acknowledge that risks to it’s employment mandate weighs higher than the risk to it’s price mandate. We like curve steepeners at this time. We like to pay 2*10 US SOFR at .15-.18 levels for an eventual target of .25-.28 post the NFP release on Friday. Stop loss to this view is a daily close below .14. We continue to remain bearish on long end US yields as fiscal risks & inflation expectations remain high. After the month end rebalancing from equities to bonds & index extension has got over by month end, we expect uptick on 10yr UST yields again. Hence for both reasons, we like 2*10 curve steepeners at current levels of .15-.18.
