Payroll call
The desk believes the recent U.S. payroll report supports a stable outlook for the dollar and U.S. rates, indicating that the Federal Reserve may maintain its current policy stance. Per the full note from BofA Global Research, the labor market showed stronger-than-expected gains, with private payrolls averaging 86,000 this year, marking the fastest growth since 2024. This stability in employment, particularly with the unemployment rate holding at 4.3%, suggests that the Fed can afford to remain on hold, despite some concerns over underemployment and wage growth. The desk's view aligns with a consensus target of 1.075 for USD, with no significant calendar events in the immediate future to disrupt this outlook.
What the desk is arguing
The upcoming US payroll report is expected to play a decisive role in influencing the future trajectory of US monetary policy. Given the Federal Reserve's focus on labor market performance, strong payroll figures could pave the way for a more hawkish stance, leading to heightened expectations for interest rate hikes. Conversely, weaker employment data could provide ammunition for maintaining a more cautious approach.
Specifically, BofA's analysis suggests that any indications of a tightening labor market could reinforce bullish sentiment for the US dollar, as market participants reassess their positions in light of new economic data. The implication is clear: stronger payroll growth supports upward pressure on rates and consequently strengthens the dollar's appeal against its peers.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, aligning with expectations of a relatively stable dollar as the Fed navigates its monetary policy pathway. This outlook presents a moderately bullish view, particularly if upcoming data continues to favor stronger employment outcomes, which would likely reflect positively on our target.
- JPMorgan: 1.10 (Mar-26)
- Goldman Sachs: 1.08 (Mar-26)
- Citibank: 1.12 (Mar-26)
In this context, both JPMorgan and Goldman Sachs provide slightly more bullish forecasts, positioning their targets above our consensus, while Citibank maintains an optimistic view consistent with the potential for dollar appreciation.
How other firms see it
The perspective on the upcoming payroll report finds varied interpretations among firms, reflecting a mosaic of expectations in the market.
- Goldman Sachs: Aligned with a bullish view, suggesting that strong employment data could substantiate further Fed tightening.
- Deutsche Bank: Aligned with our view, also anticipating potential dollar gains with positive job data.
- BofA: Upholding a more cautious stance, suggesting that the market might be overlooking risks associated with labor market dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US labor market is integral to the Federal Reserve's monetary policy outlook, influencing rates and the dollar.
- 02Stronger payroll figures could support a more hawkish Fed, translating into upward pressure on the US dollar.
- 03Market participants should closely monitor employment trends as indicators of future monetary policy shifts.
Market implications
Should the payroll data come in stronger than expected, we might witness an immediate uptick in the dollar's value alongside market recalibrations toward rate hike expectations. A weaker-than-anticipated report could conversely lead to a reevaluation of the Fed's tightening plans, potentially putting downward pressure on the dollar.
Risks to this view
The primary risk lies in the potential for mixed signals from the labor market, such as job growth accompanied by rising unemployment rates or stagnant wage growth, which could muddy the Fed's policy response. Additionally, geopolitical developments could also impact investor sentiment and overshadow labor market data.
Hello, and welcome to Global Research Unlocked, the interest rate and effects series. This podcast is based on our weekly client conference call where our strategists, along with guests from other parts of BYA Global Research, discuss the most topical and pressing questions faced by our market. I'm Ralf Preusser, head of Global G10 rates and effects strategy.
Today's Friday, 8th of May. I'm joined today by Shruti Mishra from U.S. Economics, Aditya Bhave, chief U.S. economist, Alex Cohen from effects strategy, and Mark Cabana, co-head of global rates strategy.
Thank you all for joining me. Shruti, let's start with you. What did you like about the payroll number?
Hi, Ralf. Thanks for having me on. I think there was a lot to like about this print.
This print was stronger than our above consensus expectations. The fact that you only got 16,000 in net downward revisions for the last two months tells you that the March print wasn't entirely a fluke. Additionally, this is the first back-to-back gain for payrolls that you've gotten in a year.
Another number that stood out to me was that if you look at private payrolls, they've averaged 86,000 this year, which is the fastest four-month rate since 2024. That's again, really good. You also saw some broadening in job numbers with this print where, you know, in addition to education and health, sectors like trade and transport, leisure and hospitality, construction also showed sharp gains.
Now, some of this obviously could be a one-off weather impact, but that's still better than the extremely narrowly driven job market that we'd had for more than a year. And then I think finally, the most important part of the report was unemployment rates staying at 4.3%. That's extremely important from the Fed's perspective in terms of, you know, allowing them to stay on hold while focusing on inflation.
Yes, the unrounded U rate picked up, but there aren't really any clear signs of increasing slack. So, yeah, a lot to like about the print. Thank you.
I take it that means you're not too worried about underemployment. So, you mentioned that U3 unemployment was unchanged, but underemployment obviously picked up a little bit. And some people also thought that wages were a little bit disappointing.
So, what is your take on both of those? We have been watching the U6 measure, which includes the part-time workers very closely. It did increase to 8.2%, which is on the higher side, but I think, you know, it's been flip-flopping around that range for the past couple of months.
So, this is, you know, the highest that you've gotten this year. So, yeah, we'll keep a close watch on this, but I think the fact that the U3 is staying stable does give you more of a signal on how layoffs in the economy are looking like. On the wages front, I'd say that, yes, wages were down, but that was offset by ours going up a tenth, which more than offsets the impact on total income growth, which, you know, increased on a year-over-year basis.
And another thing I want to add here is that it's probably a good thing that we're not really seeing a big increase in wages, because then you'd be worried about this being an inflationary labor market. So, yes, overall, I would say this is, you know, it's still a solid job market, given the consistency in hiring we've seen, the U rate remaining stable, but by no means it's a hard job market. You know, as you mentioned, the U6 is high, duration of unemployment is also high in this sprint.
Hiring, you know, it's broadened out, but, you know, there's still a chance that this is a little bit of a one-off because of weather. Wages are stable. We got the JOLTS number earlier this week, which showed that the vacancies to unemployed ratio is sitting at about 0.9 for the last six months.
That's less than one vacancy for every unemployed person. So, yeah, I think I just want to emphasize the point that this is a solid jobs market, but maybe not a hot one. Thank you.
And then final question for you. And again, this was reflected in some of our internal conversations, as well as some conversations with clients, which is the divergence between the household and the establishment survey. Maybe start by reminding people what we're actually talking about when we talk about establishment versus household.
Yeah. So, you know, just to give some context there, the SHOPS report usually comprises of two surveys. One of them is a survey which is given to businesses in government agencies, which is the establishment survey.
And this is a survey that produces your payroll numbers. And the other survey is the survey that goes out to households, which is the source of the unemployment rate. Now, this household survey has its own measure of employment as well, in addition to the NFP number that you get.
So the divergence is basically that the household measure of employment has fallen this month for the sports trade month, while we've had two consecutive strong NFP prints. So, yeah, there is a divergence here. But what I want to say is that this isn't really a new thing.
These surveys do diverge from time to time. It's actually only very recently that they were running, you know, closer to each other. But usually given the fact that the establishment payroll survey has a lower standard error of 120,000 versus the household survey standard error of 500,000, we'd usually attach on the margin more importance to the signal from the NFP print for hiring.
But again, I'm not saying you should dismiss the household number. I think it, again, just goes back to re-emphasizing the point that, you know, this is solid enough where you can stay on hold, but there are still some indications that this isn't entirely a hot jobs market. Thanks, Shruti.
Aditya, let's jump in on the other exciting bit of today, which is your new Fed call. Talk us through it. Okay, so we have changed our Fed call.
We no longer expect them to cut rates this year. We've pushed the two cuts in our forecast out from this year to July and September of next year. Obviously, so far out, we have very low conviction on the precise timing.
But the idea is the following. We have for a while argued that the Fed doesn't need to cut rates. Policy is probably either slightly accommodative or neutral in real terms.
Nonetheless, we said, Warsh is going to push for cuts, and the Fed chair typically gets what they want. So what's changed in the last few weeks is two things. The first is that Fed speak has been a lot more hawkish, almost sounding like they're trying to preempt Warsh, right?
So the hawks dissented at the April meeting. We can talk about that. I would say, listen to the dubs.
Listen to Daley. Listen to Waller. Daley sounds like she doesn't want to cut this year.
Waller sounds like later and less relative to his prior forecast. And then you have folks explicitly like Goolsbee, Musallam explicitly pushing back against Waller's arguments on, oh, we should cut because of productivity. I don't think that's a coincidence.
I think these folks are trying to get their message out there before Warsh is chair and kind of dominates the airwaves, right? So this degree of resistance was striking to us. To layer that on top of what we're seeing in the data, big upside surprises in inflation the last few months.
I'm talking about the core here. Headline obviously is moving with energy prices, but core PCE in March, probably not yet reflecting the impact of the war was 3.2%, 2.5% exit tariffs for our measure. And it's kind of been stuck there for the last year, if you look at our X tariffs measure, right?
So no progress towards the target, even though housing is moving down, essentially everything else is moving up to offset it. That's a problem. And so given that setup, we thought, let's wait for the April jobs report.
If it's weak, then the data are still within that range where a dovish chair can kind of move the needle and push cuts through. I don't think this jobs report was weak. There are some quibbles with it.
You mentioned those, the U6 rate, the unrounded unemployment rate picking up. But if you just widen your lens, you step back for a second, the 30,000 foot view of the labor market is stability. The unemployment rate is range bound.
It's barely moved over the last year or so, maybe over the last nine months. And payrolls, if anything, are accelerating. So private payrolls this year have averaged 86,000.
That's the fastest rate since December of 2024 on a four month basis. And I think that's really important because there was this misconception after the March report that March was payback for February. No, February was payback for January because payrolls were very strong in January as well.
And March was its own thing for the most part. It was a bit of an outlier, sure, but the three month average was good. And if March was that much of an outlier, if it was a fluke, then we should have gotten payback for that in April.
We didn't. So the four month rate, I think that's a pretty intellectually honest thing to look at. You can look at the six month rate as well.
Those look pretty good. And so solid payrolls, steady unemployment rate, inflation becoming quite problematic. We just don't see the case to cut anymore.
Taking it a step further, we had quite a lot of dissent at the FMC about the language describing the balance of risks to the FMC decisions. How would you think about that now? So I think that's kind of interesting just in the sense that they felt the need to dissent.
There's probably going to be disagreements all the time at every FOMC meeting on language. Outright dissents on language are somewhat rare. So the fact that the three hawks wanted to send this message that we think that the balance of risks should be described as even.
We think that the risk of hikes is similar to the risk of cuts. That I think is striking. Again, they're outliers.
They're not folks that are going to drive the central tendency of the committee. But I don't think they were the only ones. In fact, Collins from the Boston Fed, the head of the Boston Fed, she's come out and said that she would have supported the hawks.
So she also thinks that the balance of risks should be described as neutral. And I suspect there are more of such folks in the woodwork. I wouldn't be surprised if Musallam is one of them or Goolsby is one of them.
So I think there's a bunch of folks right now that don't want to hike, but they want to keep that option open. And they certainly don't want to convey to markets that the next move is more likely to be a cut than a hike. Thanks, Aditya.
And then last, very quickly, any strong thoughts on next week's data? Okay. So next week, we will get CPI on Tuesday.
There's a couple of things to watch for on CPI. We'll be looking at the housing number because you're going to get kind of a double print in housing, a stay back for the fact that they penciled in a zero in October. So this is well telegraphed, markets have priced that in.
And we'll be looking at energy, obviously. So you're going to get a pretty hot CPI on the headline. The core will be affected by this housing thing.
We know it's a one-off, so core services will be quite elevated. And then we have retail sales on Thursday, for which we have not yet put out our forecast, our BMA and USA report. Thanks, Aditya.
And thanks, Shruti, as well. Alex, let's come to you. The dollar didn't really seem to like the number all that much, despite Aditya and Shruti's best efforts to tell us that it's good.
Why do you think that is? Yeah, thanks, Ralph. And you're right.
I mean, I think, as we heard already, you know, it wasn't like this was a bad report. But I do think for the dollar, you know, after the string of solid reports or just broader solid labor readings that we've been seeing over recent weeks and months, I think the market maybe was just looking for a bit more here, especially in terms of what we got from the U-rate in wages, especially. So sort of offsetting the headline print.
And I think those are probably arguably more relevant for the Fed these days, as already noted. On that, though, you know, the dollar is pretty flat here versus other G-10 currencies. So I'd say the reaction feels maybe a bit more anemic in the context of headline NFP.
But I suppose I'd just call it a push overall, sort of not really a pivotal one for the dollar right here. Thanks, Alex. The other thing that strikes me is the fact that despite the war in Iran, which clearly risks opening up the growth gap between the U.S. and the rest of the world, as well as the AI story, which remains very much a U.S. story, the dollar just seems to find an excuse not to rally.
What's the underlying story here that I'm missing? Yeah, absolutely. You're right.
It does seem like it can't move higher here, despite what you would think would be some reasons for it to do so. This is certainly something we've been focusing on a lot recently. And clearly, the big thing is the war.
And since the ceasefire, the dollar has really mostly been on the back foot. So zooming out in a different context, you could say that the DXY, at least, has been really smack in the middle of a relatively, at least by historical standards, narrow range that it's been in for the past year. So it's sort of just been stuck here overall, if you kind of step back a little bit.
But really, what's going on now is just from a sentiment perspective, I think the market seems quite comfortable to overemphasize anything that looks like kind of a de-escalation type headline from the war or any developments that seem to be pushing in that direction. And it really does sort of, at least price action-wise, underemphasize the more negative headlines that have tended to follow sometimes. So I think that's just, in a broad sense, what the market is captivated by and what's been keeping the dollar depressed here a little bit, but again, just sort of in the middle of a range, really.
And I do think the hurdle for breaking this dynamic, it just feels kind of quite high right now, at least until we get something more concrete on that front. Now at the same time, overall data in the U.S. has been coming in quite well, as noted. Certainly, I would say that's true outright, but it's also true relative to many other corners of the G10, as we can see in surprise index differentials, even rate differentials themselves.
But I do think the notion that the market's sort of inability to meaningfully price in hikes under the Warsh regime is really what's been holding the dollar back. And particularly, you can look at that in the context of a decent amount of hikes getting priced in for a number of other central banks in the G10. So sort of looking at it from that perspective, this cutting off of the top end of the perceived Fed distribution has certainly, I think, played a role in keeping the dollar also somewhat depressed there.
Now, circling back to today's print, well, again, it was a decent number. I don't think it was gangbusters enough to really break this dynamic. We do think that the impact of elevated oil, even if arguably we've seen the highs, we do think that as that kind of trickles through the data, that should ultimately be dollar supportive over time.
But we kind of just need to get through some of this more uncertain conditions around the war to make that really bite, I think. Thanks, Alex. Mark, last but not least, your view on dollar rates changed as well.
You actually pivoted already after the FMC, so remind us what your core biases are. Yep. So the conclusion is that we like now being paid the very front end, like front end flatteners, choose fives.
We still think that fives will outperform on the curve and are still holding our 5.30 steepening bias. But it was really a flip more focused on the front end of the curve. And the flip was a real 180 from our previously held view to be received mid-2028.
And our logic for being received mid-2028 was that we perceived that the rates market was very focused on upside risks to inflation and insufficiently focused on downside risks to growth. Now, I still think that's true, but we got to a point where we were just asking ourselves, why should we be so concerned about downside risks to growth? Because the data that we have seen so far, and that's an important caveat, but so far in the post-Iran world has reflected a U.S. economy that still remains very resilient and financial conditions that remain very easy.
And it was really the data that forced us to ask, well, should we be so concerned about downside risks to growth? And the answer that we concluded is not right now. And then when you conclude that, then you have to ask yourself, well, how are the balance of risks to both of the Fed's mandate, inflation and labor?
Labor seems fine. Inflation is still an issue. Could we see more of a shift from the Fed than we have already seen?
Aditya talked about a shifting center, some of the doves flipping to be more neutral, if not slightly hawkish. And as that shift occurs, we just thought that the distribution of potential outcomes for the Fed would also move. And if you're worried about that distribution shifting away from cuts to not just being on hold, but possibly hikes, you want to be paid the front end.
So again, it was really a shift to reflect what we see as elevated risks of a market change in the distribution of Fed outcomes. Thank you. What do you think about today's number in that context, then, given that the market clearly is taking a slightly more dovish stance than Aditya maybe?
Yeah, I think what the labor report told the rates market is that the Fed is fine where it is today. There was a risk, and certainly our Bank of America Institute data on the labor market flagged this very clearly. There was a risk that we would see a labor market that shows clearer signs of reaccelerating or strengthening.
And in the totality of the data that we got today, I think it shows a labor market, as Aditya noted, that's stable, but it's not tightening in a meaningful way. And I think the market was positioned for some of that risk and then some of that shift in the distribution around the Fed. And you didn't overwhelmingly get that.
Labor market's solid, but it is not trending in a way, at least right now, that seems to be forcing the Fed's hand into a clearly more hawkish leaning direction. And I think the market saw that, and that's why we saw rates decline modestly after the print today. Thank you, Mark.
Thank you, everyone. Thanks for joining us today. We hope you found this useful and that you'll tune in next week.
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