The US NFP on Friday surprised the markets as the data came out much better than expected. I would argue that the part that weighed the most was the strong average hourly earnings figures.

Now, I'm not an economist, so I try to look at it from a market participant's perspective gathering analyses from the experts in labour market data. Let's look at some of them.

Unemployment Rate

The unemployment rate edged higher and set a new cycle high at 4.0%. The unrounded number was 3.96%, which is a bit less worrying.

The chart below from @econberger on X, shows that the entirety of the May increase in the unemployment rate came from re-entrants and new entrants and the unemployment due to permanent layoff was flat. So, all in all, that's good news.

unemployment rate

Participation Rate

The participation rate fell from 62.7% to 62.5%. The primary losses were in the 20-24 age group, but as Joseph Brusuelas - Chief Economist of RSM US LLP pointed out, the reason is that it captures the transition from school to summmer and it's more noise than signal. This has happened in the May data a number of times over the past three decades.

On the other hand, if we look at the prime age labour force participation rate, it increased to 83.6%, which is a new cycle high and overall good news.

prime age participation rate

Full-time and Part-time Employment

Now, this is where there's bad news. Full-time employment has been falling and that generally happens when the economy is in a recession or about to enter one. On the other hand, we have part-time employment for economic reasons rising which is another indicator of impending recessions as people struggle to find full-time jobs.

We do have other soft data pointing to a weakening labour market like the Kansas Fed Labour Market Conditions Index for example which has been rising steadily. So, there are definitely signals for caution.

part-time vs. full-time jobs

Average Hourly Earnings

This is what I think impacted the market the most given that it's what central banks have been monitoring carefully and what could keep inflation higher for longer.

Now, this may just be a bump on the road as other leading indicators point to a downtrend in wage growth like the recent job openings data for example.

It triggered a hawkish reaction, but the market's pricing didn't change much as we still keep on expecting between one and two rate cuts by the end of the year. We will need "persuasive" evidence of a re-acceleration or lack of progress on inflation to price out entirely the rate cuts, or price in a rate hike.

Given that the Fed is also worried about the labour market and some of the bad signals it is sending, the bar to make them turn hawkish is very high.

quit rate vs. wage growth


To sum up, the US jobs report was overall a good one although there was some slack. It did change the market sentiment and the price action might remain tentative heading into the US CPI and FOMC decision on Wednesday.

In the bigger picture though, it's still looks like a softening but resilient labour market, so the risk-on sentiment might still come back although it will likely need a catalyst.

In fact, I would personally wait for the US CPI release as that could reinforce the risk-off sentiment in case of hot figures, or it might change it completely if we get good readings.