US macro/ISM vs NFP jobs

Back from travel, normal blogging services resume.

Last week, two quite divergent pieces of macro data sent rates and FX markets into something of a spin (at least for a few days).

Firstly the NFP data (non farm payrolls); overall it was quite good, 216K jobs created in the month, a little above the longer run average (~200K) and above what is needed to absorb population growth (~c100K).

Wages (average hourly earnings) grew in the month (0.44%), that’s a little hotter than one would like, especially to get an “easing cycle” from the Fed, but a raft of other measures (like temporary help, quit rates, job openings, employment to population, hours worked) all suggested things were more inline with expectations, namely an easing labour market, one that isn’t overheated or even especially tight.

Summarising, with quits, temp help, job openings, and NFP all at or below longer run averages (see the range of graphs below, e.g. quits 2019 average level, or job openings time trend (dashed pink line) average)), you could make the argument that the Fed funds rate doesn’t need to be in the 5s, when in 2019 the same values prevailed at a Fed funds rate closer to 2%, and hence why overall the data is consistent with the Fed commencing an easing cycle.

However, hours later, we got the ISM services data, which showed activity weakening by quite a bit. Here, new orders fell from prior levels, as did prices paid, but employment fell off a cliff, down to 43.3 (see the bottom left hand graph).

That isn’t “goldilocks” type data at all, that is “red alarm claxons ringing reccession” type data, and would at the least bring your view on rate cuts forward (from May to March and really, if the data were correct, to January!).

The numbers were queried with ISM (Institute of Supply Management, who runs the survey data) who confirmed, at least to their knowledge, that no errors had been made.

Markets didn’t know what to do with this, and the 10 year oscillated quite a bit in the time between the two data releases, eventually winding up not too far from where it had started, and then drifting a touch higher in the days since, as the market decided “goldilocks” was more likely than what the ISM data suggested.

Overall, that is our view too. I can’t imagine things deteriorated quite so quickly on survey-based data (ISM) without being visible in a range of other hard data (i.e. non survey-based), not the least of which would be something like applications for unemployment benefits.


Despite being a fascinating (prior) week of data, and noting the muddy waters in the analysis outlined above (staring at graphs at trying to work out what they are telling us overall), our general viewpoint is essentially the same (i.e. unchanged).

In 2019, the Fed funds rate was closer to 2%, and by Jan of 2020 (moments before the anvil of the pandemic dropped) the Fed had been cutting rates, as inflation and output growth moderated even at that ~2% prevailing rate.

Given that annualised quarterly and six monthly inflation data is within range of the 2% target, and given that NFP, quits, job openings and EPOP (employment to population) are all within their 2019 range, it doesn’t appear to make sense to maintain the cash rate at above 5%, when it was closer to 2% then on the same metrics.

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