UBS On-Air: Paul Donovan Daily Audio 'Hiring, firing, and imprecise data'
The desk anticipates that the US May employment report will reveal significant discrepancies in the data, particularly amid signs of weakness in the leisure and hospitality sectors. Per the full note from UBS, this labor market report will correct prior discrepancies and could serve as a pivotal moment for Federal Reserve policy decisions, especially as average earnings may rise without reflecting actual wage growth. Key data highlights will be critical as traders position ahead of the report, particularly with regard to local economic signals. This focus aligns with the broader context of an increasingly data-sensitive Fed environment, where employment metrics remain central to monetary direction.
What the desk is arguing
The desk believes the upcoming US May employment report is likely to show adjustments that correct previous data inaccuracies, particularly pointing towards weaknesses in lower-wage sectors like restaurants and leisure travel. This could result in higher average earnings figures, leading to potential misinterpretations of wage growth. The note emphasizes that these discrepancies can significantly affect Fed actions due to the central bank's reliance on such data to gauge labor market health.
Evidence suggests that lower employment in the service sector will not necessarily translate into lost wages, which might initially appear positive as average earnings rise. However, as this data may also set the stage for Federal Reserve policy shifts, it underscores the importance of understanding these nuances when interpreting the employment figures released this month. The focus then is not just on jobs added but how wage dynamics play into the larger economic picture.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, with recent ranges indicating a minimum of 1.04 and a maximum of 1.12. Key contributors include: - jpmorgan: Target of 1.10 (Mar26) - bofa: Target of 1.04 (Mar26)
Given this context, the desk's focus on the May employment print might place our outlook at the higher end of this spectrum, lending credence to potential dollar strength if wage indicators meet or exceed expectations.
How other firms see it
Firms such as jpmorgan and citi are aligned in their optimism regarding USD strength, underpinned by data-driven policy expectations from the Fed. Conversely, bofa expresses caution, suggesting weaker economic signals could dominate sentiment and limit dollar appreciation.
With positioning around USD/JPY and USD/CAD likely impacted by the labor report outcome, traders should remain vigilant to fluctuations in these pairs as wage and employment data come to light.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Upcoming May employment report expected to correct past discrepancies
- 02Average earnings could rise without actual wage growth
- 03Fed's data dependency suggests significant implications for monetary policy
Market implications
Watch for the employment report to dictate near-term USD strength, particularly if average earnings show a material increase. A consensus expectation for robust job creation could push the USD higher against major peers.
Risks to this view
Terminate the bullish outlook if the employment report indicates a significant drop in job creation or a contraction in wages that contradicts the anticipated earnings growth, leading to decreased Fed hawkishness.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Friday the 6th of June. It is US Employment Report Friday, which comes with two regular reminders.
First, the quality of this data has deteriorated in recent years and we should expect sizeable revisions to these numbers in the future. Second, average hourly earnings are not and never will be wages, and that is especially important today as the weaker tone to sectors like leisure travel and restaurant spending, which hire lower paid workers, could raise average earnings by reducing the number of poorly paid members of the workforce. This report will include revisions to correct errors in the last household survey, which are different from the revisions caused by more information being received.
This was a calculation error. The labour market matters because in a world where data dependency is the regrettable policy choice of the US Federal Reserve, a weaker labour market, if sustained weakness, is what will trigger a move towards rate cuts. The market expectation is for a slowdown in job creation, but still a positive number.
There is a downwards bias to the forecast range. The most common assumption is a below consensus forecast result. Today's numbers are very unlikely to change course for the US Federal Reserve right now, although a weaker print may well provoke more social media posts from US President Trump demanding that the Fed cut interest rates.
Rate cuts are a very limited remedy to a labour market that has slowed hiring in the face of uncertainty. Rate cuts would be more effective if weak consumer demand was leading to an acceleration of firing, but that is not likely to be the case just yet. Yesterday's ECB meeting produced the expected rate cut, and on balance a mixed picture for future rate reductions.
A July cut is certainly still plausible, and there was a note of caution struck by ECB President Lagarde in their press conference remarks, which caused markets to reduce rate reduction expectations overall. Today's data is not going to push investors in one direction or another. The German April trade data is of some interest in the context of trade disputes, but it's also too distorted by firms reacting to the uncertainty of trade policy to offer much in the way of forward-looking guidance.
Lagarde is speaking again today, and in theory is not going to shift their position from the press conference statements yesterday. Lagarde has on occasion tweaked remarks if unhappy with market reactions to initial statements, but given the relatively modest response to the press conference, that doesn't seem too likely today. It almost seems against the spirit of Pride Month that so high a profile a male-male partnership should be having such a public disagreement, but the acrimonious breakup of US President Trump and Trump megadonor Musk has happened anyway.
Sources & References
How we cover this story