Top of the Morning: The week in review and preview
The latest jobs data from the US labor market presents a mixed picture that is likely to influence Federal Reserve policy in the near term. Per the full note from UBS, nonfarm payrolls increased by 139,000, exceeding expectations but accompanied by substantial downward revisions of 95,000 for the previous two months. This subtle deceleration indicates the Fed may hold off on any rate cuts as we head towards the mid-year, especially given expectations for slower payroll growth driven by tariff impacts later this year.
What the desk is arguing
The desk interprets the latest jobs data as supportive of the Fed maintaining its current interest rate stance, navigating between the need for stability amidst labor market adjustments. The mixed report suggests a labor market that, while still robust in headline numbers, is showing signs of strain particularly in areas outside of healthcare and leisure.
Alongside a stable unemployment rate at 4.2%, which masks a decrease in participation rates, this paints a nuanced picture of a labor economy in transition. UBS posits that with tariffs and immigration policies squeezing supply further, upcoming growth numbers may falter, necessitating a careful watch on the Fed’s next moves.
Where it sits in our coverage
As it stands, our current consensus target for USD/EUR is 1.075, with a range spanning from 1.04 to 1.12. Notable projections include: - JPMorgan: 1.10 for March 2026 - BofA: 1.04 for March 2026
This perspective aligns with JPMorgan's optimism for a more stable USD outlook, while BofA presents a cautious contrast at the lower bound of the range, reflecting more bearish sentiments regarding USD strength.
How other firms see it
Several firms view the current market conditions as aligned with a cautious monetary policy approach, reflecting expectations of volatility shaped by the most recent employment data. BofA remains skeptical, recommending a more cautious strategy in light of slowing economic signals.
Given the dynamics of the labor market, closely monitoring pairs like USD/JPY and USD/CAD will be critical. These currency trajectories are likely to respond to any Fed comments stemming from the labor data, particularly as we await further indicators of inflation and economic health moving into the second half of 2023.
01US nonfarm payrolls rose by 139,000, signalling mixed labor market health.
02Unemployment steadied at 4.2% amidst falling participation rates.
03Fed likely to maintain rates, with attention shifting towards tariff impacts and labor supply constraints.
04Consensus target for USD/EUR sits at 1.075, indicating market balance amidst varied predictions.
Market implications
Traders should focus on the psychological level of 1.075 for USD/EUR, as movements around this mark will indicate trader sentiment influenced by Fed policies. Keep an eye on any indications from the Fed regarding potential future rate hikes or adjustments stemming from employment data effects.
Risks to this view
Should subsequent economic data suggest a stronger labor recovery or inflationary pressures increase unexpectedly, the Fed may pivot towards a more hawkish stance, invalidating the current call for maintaining rates and potentially strengthening the USD.
ubs
Hi everyone, Siobhan Chapman here and welcome to Top of the Morning on the UBS Market Moves podcast channel. It's Friday morning, which means it's time for the weekend review and preview conversation where my guests will recap how markets have performed over the past few sessions and preview what you can expect in the week ahead. Today's conversation will primarily focus on the May employment report and the Fed's Beige Book.
Joining us for the conversation, I'm glad to welcome back Danny Kessler, Asset Allocation Strategist with the UBS Chief Investment Office. Danny, welcome. We're happy to have you.
Great to be back, Siobhan. Thanks for having me on. Perfect, Danny.
So let's get started. Let's begin with the May employment report. How did the data come in and how would CIO characterize the current health of the U.S. labor market?
Sure, Siobhan. Yeah, so this is hot off the press having just been released a half hour ago. Overall, we characterize the report as mixed.
The headline nonfarm payrolls number came in at 139,000, slowing from last month but well above consensus estimates. But there was also 95,000 of downward revisions for the prior two months. The unemployment rate stayed steady at 4.2%, but only because the participation rate fell a couple ticks.
Average hourly earnings remained solid at four-tenths of a percent month over month. The payroll growth was heavily concentrated in health care and leisure and hospitality while it was near zero in most other industries. The number of federal government employees fell by 22,000, which is a sizable increase but not dramatic.
Bottom line from the report is that the data is not weak enough for the Fed to consider cutting rates yet. We are expecting slower payroll growth in the second half of the year as tariffs start to have a larger impact on the economy. This will be supported by the immigration crackdown, which is likely to limit labor supply growth and any increase in the unemployment rate.
There were also a couple other labor market data releases this week, including weekly jobless claims yesterday with initial claims rising above consensus estimates, but continuing jobless claims declining to below consensus estimates after rising last week. The April JOLTS, or Job Openings and Labor Turnover Survey, was also released earlier this week with job openings rising above consensus estimates. The hiring rate edged higher to 3.5%, while the quits rate, which is a key measure of worker confidence, dipped down to 2%, its lowest level since 2021.
Layoffs tipped higher but still remain at historically low levels. Although job openings rose in April and overall conditions remain solid, the modestly declining quits rate and slight uptick in layoffs indicate that there is some softening in the labor market momentum. The labor data releases this week appear to be in line with our broader view of the labor market, which is one that is cooling gradually but with demand for workers remaining solid.
So outside of today's jobs report, what were some other notable data releases? Yeah, so I just mentioned a few of the notable labor market data releases, but we did get more important economic data outside of that. Equities and rates markets stayed mostly range-bound to go with those releases.
Before digging into a few of the other economic events, there was one other development I wanted to highlight in the past few days, and that's that a couple of tech giants actually signed deals for nuclear energy amid power demand fueled by AI growth, which is supportive of the tech and utility sectors that we rate as attractive as part of the UBS investment trios. So turning to economic events that happened over the past week, we started the week with the release of the ISM Manufacturing PMI on Monday and Services on Wednesday. For those of you that don't know, ISM stands for Institute of Supply Management, and PMI stands for Purchasing Manager Index.
So these indices are a measure of economic activity in the manufacturing and services sectors through surveys of participating purchasing managers. Both releases were disappointing, declining from previous months and below consensus expectations, with the services industry coming in particularly weak. Construction spending growth was also released on Monday, and that came in disappointing as well at negative four-tenths of a percent on a month-over-month basis.
April eurozone inflation was also released this past week, dipping below the 2 percent target on a year-over-year basis for the first time since this past October. And then the European Central Bank in turn followed by lowering interest rates another 25 basis points for the eighth time this cycle, bringing the deposit rate down to 2 percent. We expect the Federal Reserve to resume easing in the second half of 2025 with 75 basis points with cuts on the year and 25 more to start next year.
The path of the Fed remains data-dependent, and members have indicated that they are not yet ready to begin lowering interest rates in the current economic backdrop of a resilient labor market and economic uncertainty due to tariffs. We also received the Fed's Beige Book on Wednesday. Is there anything to note there?
Yeah, so that was another one of the big economic data releases this past week that I haven't touched on yet. For some background, the Beige Book is a summary of anecdotal information on current economic conditions prepared by the Federal Reserve. So each Federal Reserve bank will gather information through reports from bank and branch directors and interviews with key business contacts, economists, and market experts.
So this latest release of the report showed weakening economic activity with all 12 districts reporting elevated economic and policy uncertainty. And as a result, businesses and households are showing growing hesitation around spending and hiring decisions. Tariffs, of course, remain a major concern, as they were mentioned 122 times in the report, which is up from 107 in the previous edition.
So the release illustrates that while we are yet to see a major slowdown in growth or a rise in prices, many contacts across districts now expect both costs and prices to rise more quickly and significantly in the coming months. Companies are split and undecided on how to handle tariff-related costs, with some planning to pass these costs on to consumers, while others are considering temporary fees or reduced profit margins. The tone of the report has become notably more cautious, with uncertainty around trade policy weighing on investment and hiring.
These effects are likely to begin to show up in hard economic data in the coming months, in our view. At a time when economic data is noisy, anecdotal dividends can become increasingly important, and the picture painted by the Beige Book this past month is not a bright one. Despite this downbeat outlook, the current backdrop remains in a forgiving position, with inflation moderating and the labor market staying relatively resilient.
We expect U.S. growth to slow to around 1.5% in 2025, GDP growth, that is, and with Fed rate cuts beginning later this year in our base case. So we are coming to the end of our conversation, Danny. Turning to the week ahead, what is taking place that investors should be mindful of?
Yeah, so it's another busy week of economic data next week, starting with the NFIB Small Business Optimism Survey on Tuesday, followed by the Consumer Price Index Inflation Gauge on Wednesday, and the Producer Price Index Inflation Gauge on Thursday, along with Weekly Jobless Claims on Thursday, and then finally on Friday, we wrap up with the University of Michigan Consumer Sentiment Survey. Investors will get a few more data points to add to the inflation puzzle, with the picture of the inflation and Fed rate pass still not fully in focus. Outside of economic data, President Trump's second term has certainly been eventful, with rarely any dull weeks, and that looks set to continue into the summer.
There are plenty of domestic and international policy storylines to follow, starting of course with tariffs, but also including the President's one big beautiful bill, the war in Ukraine, travel and immigration restrictions here in the U.S., and most recently, the President's public feuds. None of these headlines have any planned resolutions in the coming week, and all contributes to market volatility, but the biggest drivers of markets in the near term are likely to be tariffs, the war, and the fiscal bill. The war in Ukraine has contributed to price movement in commodity markets this year, with gold rising on geopolitical uncertainty, but oil prices falling.
Of course, the most important impact in the war is the tragic number of lives lost, and the governments across Europe are working with the U.S. and Ukraine to increasingly pressure Russia for peace. Turning to tariffs, the President ramped up his rhetoric again last week, telling countries to come back with their best trade deals for the U.S. Meanwhile, tensions flared again with China following a previous agreement and de-escalation.
Presidents Xi and Trump are set to meet in person soon after a phone call yesterday. President Trump has also ramped up pressure on the EU, threatening 50% tariffs on the bloc, while 50% tariffs on aluminum and steel have gone into effect this past week on the rest of the world, excluding the UK. This all comes in the aftermath of the U.S.
Court of International Trade's May 28th ruling to invalidate and permanently enjoin President Trump's use of the International Emergency Economic Powers Act, or IEPA, to enact tariffs, although the U.S. Court of Appeals for the federal circuit granted administrative stay since then, which is allowing the tariffs to remain in effect temporarily. So while the future result of this legal battle is not yet clear, it can be a bit complicated for investors to try to follow.
Our view is that the President's tariffs are likely to stay in place through one channel or another. There are multiple legal pathways for the administration to rebuild the wall of tariffs. So we expect the effective tariff rate, which is the dollar amount of customs duties divided by imports, to end the year at roughly 15 percent, which is near where we are now and many times higher than the 2 percent we begin the year at.
The economy will have to adapt, but we believe that it can, albeit with slowing growth and upside risks to inflation. And then lastly, on the President's one big, beautiful bill, a July 4th deadline has been set, and we believe the bill will get passed to the Senate following further negotiations after it barely passed through the House by one vote last month. The bill is set to cost about 2.4 trillion dollars, which could initially be stimulative.
The Yale Budget Lab estimates that tariffs could raise two trillion dollars in revenue over the next 10 years, which would offset much of the cost of the bill. But that said, the U.S. will not have improved its ballooning fiscal deficit as a result. So as has been the case over the past few months, there is plenty of activity for investors to monitor, along with a busy schedule of economic data next week.
OK, perfect, Danny. Thank you so much for joining us. Thanks again for having me on, Siobhan.
Happy Friday, everyone. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels, along with our video offerings such as UBS Trending.
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