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In case you missed it, yesterday’s NFP report was rather disappointing, which sent the Greenback reeling in pain across the board. And if you want a quick rundown on the most important bits, then read up on today’s write-up.

USD Index: 15-Minute Chart
USD Index: 15-Minute Chart

Downside surprise for payrolls

  • May non-farm payrolls: 138K vs. 180K expected
  • April non-farm payrolls: downgraded from 211K to 174K (-37K)
  • March non-farm payrolls: downgraded from 79K to 50K (-29K)

If you can still remember, I summarized in my Forex Preview for the May NFP report that the available leading indicators seem to point to a pick up in service sector jobs growth, which means that jobs growth in May likely accelerated. After all, the service sector has been the main generator of jobs.

In addition, I also pointed out that market analysts have a tendency to undershoot their estimates, which has resulted in more upside surprises, although I also had the following observation:

“And it may just be a coincidence, but there’s a three-year pattern of upside surprises, followed by downside surprises, followed by another set of upside surprises. And last year, we got the first downside surprise. It remains to be seen if this pattern will hold, though.”

Well, the actual reading came in at 138K which is way below consensus that the reading would come in between 180K to 186K. The leading indicators were therefore wrong and the historical tendency failed to hold up. Although the three-year pattern that I pointed out is still intact, although that may just be a coincidence.

May NFP Report: Expected vs. Actual

Anyhow, I also noted that the reading for April usually gets a downgrade. And that happened this year as well, as you can see below.

April NFP Report: Revisions

Worse, the dismally poor +79K reading in March was downgraded further to an even more dismal +50K. That’s a loss of 66K jobs from all those revisions. Ouch!

Moving on to the usual breakdown, jobs growth slowed in May because the service sector generated less jobs in May compared to April, so the leading labor indicators were really off on this one.

May NFP: Services

The manufacturing sector, meanwhile, saw no net increase in jobs because jobs growth in the durable goods manufacturing sub-sector got cancelled out by the job losses suffered in the non-durable goods manufacturing sector.

May NFP: Durable Goods Manufacturing

May NFP: Non-Durable Goods Manufacturing

Jobs growth in the construction sector did recovery after two months of poor reading, though. However, this was partially offset by the net loss in government jobs.

May NFP: Others

Wage growth met expectations, but…

  • May average hourly earnings m/m: 0.2% as expected
  • May average hourly earnings y/y: 2.5%, same as previous
  • April average hourly earnings m/m: downgraded from 0.3% to 0.2%

Average hourly earnings increased by 0.2% month-on-month as expected. Like last time, however, the previous reading was downgraded from 0.3% to 0.2%.

Also, a more accurate read shows that wage growth actually slowed in May since average hourly earnings increased by 0.15% ($0.04) to $26.22 in May versus the 0.19% ($0.05) to $26.18 in April.

Moreover, many industries slower wage growth or even a contraction. And the biggest drag on wage growth was apparently the 0.45% (-$0.15) fall in average earnings in the manufacturing sector (+0.76% or +$0.20 previously).

Year-on-year, average hourly earnings increased by 2.5%, matching the annual rate of increase printed in April. And while there was no real consensus, some market analysts were expecting wage growth to tick higher to 2.6%, so the steady pace likely disappointed them.

Jobless rate ticks even lower, but…

  • Jobless rate: 4.3% vs. steady at 4.4% expected
  • Labor force participation rate: 62.7% vs 62.9% previous

The jobless rate “improved” for the fourth consecutive month by ticking even lower to 4.3%, which is great because the consensus was for the jobless rate to hold steady at 4.4%. Even better, the 4.3% reading recorded in May is the lowest reading since May 2001.

However, the lower jobless rate isn’t actually all that great since the labor force participation rate dropped from 62.9% to 62.7%. This marks the second consecituve month of deteriorating readings, as well as the worst reading in five months.

In fact, the labor force shrank from 160,213K to 159,784K while the number of working-age Americans not in the labor force soared by 608K to 94,983K, which means that lots and lots of Americans got discouraged and just quit the labor force altogether. And that’s a bad sign.

Final Thoughts

The May NFP report looked mixed on the surface. However, a closer look at the details paints a rather negative picture overall.

Sure, non-farm payrolls in May was a miss but it was still above 100K floor, which is the magic number of jobs needed to keep up with working-age population growth. However, a look at the previous readings shows that jobs grew by 66K less than originally estimated, which is a real bummer.

And while wage growth in May managed to meet expectations, the previous reading got downgraded again. Also, a more accurate reading shows that wage growth actually slowed a bit.

And finally, the jobless rate continued to “improve” but at the expense of a deteriorating participation rate.

Again, a mostly negative report overall, so it’s no real wonder why the Greenback initially plunged as a knee-jerk reaction, only to get slammed by wave after wave of follow-though sellers a few minutes later when the market finally got a look at the details.

Also, it’s highly likely that the wider U.S. trade deficit in April (-$47,62B vs. -$45.28B previous) was weighing down on the Greenback, since that’s not a good start for Q2, especially since the wider deficit was due to exports falling by $0.05 billion while imports rose by $1.9 billion.

Moreover, odds for a June rate hike was still actually high, according to the CME Group’s FedWatch Tool.

June Rate Hike Odds
June Rate Hike Odds