(Bloomberg) -- Friday’s U.S. jobs report will be especially scrutinized by economists, investors and Federal Reserve policy makers watching for signs of cracks in the labor market as trade tensions weigh on the economy and spur bets interest-rate cuts are coming.
The Labor Department figures are expected to show payroll gains cooled in May to a still-strong 180,000, while unemployment probably held at a 49-year low of 3.6% as wage gains held up. That would offer some comfort after retail sales, factory output and home purchases showed the economy struggling this quarter after better-than-expected growth in the first three months of the year.
But even if the jobs numbers are solid, investors may still expect the situation to deteriorate as consumers feel pain from President Donald Trump’s intensifying trade war with China and threatened tariffs on Mexican goods. Private-sector reports Wednesday gave conflicting signals ahead of the jobs data, with one showing the weakest business-payroll gains in nine years and another indicating strength in service-industry hiring.
“I have seen some signs that we’re not improving at the same rate we were even six months let alone a year ago,” said Sarah House, senior economist at Wells Fargo (NYSE:WFC) & Co. “We are perhaps getting close to an inflection point.”
Fed officials have broadly viewed the economy as solid, but they’re inching toward consideration of an interest-rate cut amid softer data and escalating trade tensions. Chairman Jerome Powell signaled an openness to lower rates if necessary in a speech Tuesday, after St. Louis Fed President James Bullard became the first policy maker to indicate likely support for a reduction.
“I don’t tend to take too much signal from one particular data point -- I like to put it in context and look over several months,” Fed Governor Lael Brainard told Yahoo! (NASDAQ:AABA) Finance on Wednesday. “But I will be paying very close attention to the payrolls number on Friday.”
U.S. stocks rallied for a second day Wednesday on optimism Mexican tariffs will be avoided. Treasury yields fell and the dollar strengthened.
The Treasury market will digest the latest labor-market reading with benchmark 10-year yields hovering just above 2%. Yields have been tumbling as trade tensions escalate and traders increasingly price in Fed easing in 2019. Fed funds futures traders expect rates to be cut by more than a half a percentage point by year’s end.
Treasury yields risk sliding further if job gains disappoint, because many traders are of the view that the labor market has yet to feel the full impact of tariffs, said Peter Boockvar, chief investment officer at Bleakley Financial Group LLC.
What Our Economists Say
“The ADP (NASDAQ:ADP) Research Institute’s latest jobs report showed that hiring momentum slowed sharply in May. ... In light of this, we are lowering our forecast for May’s nonfarm payrolls, to 160,000 from 205,000.”-- Yelena Shulyatyeva and Carl Riccadonna, economists
Meanwhile, stocks strategists differed over whether a weak report would lead to declines in equities on concern that the economy is slowing, or gains amid optimism the Fed will add economic stimulus. “In this case, with so much pressure on the Federal Reserve, it could spark a rally,” said Mike Loewengart, vice president of investment strategy at E*Trade Financial Corp.
Wells Fargo’s House and others will be focusing on what the report shows on whether global weakness may be impacting U.S. hiring. So far, slowing global growth and tariffs fanning the deterioration have stayed relatively contained to the goods-producing sector.
The Institute for Supply Management’s manufacturing index fell to the lowest level since 2016 in May, and business-equipment orders dropped in April for the first time this year. Manufacturing payroll growth has averaged 7,000 jobs per month this year, down from 22,000 in 2018. Economists project a 3,000 increase for May.
“There’s enough durability in labor markets, enough of a services-oriented economy where weakness in manufacturing and trade have difficulty tipping the economy over,” said Michael Gapen, chief U.S. economist at Barclays (LON:BARC) Plc. Barclays expects the Fed to cut 75 basis points this year. “One of the reasons we’re not calling for anything worse is because we think there’s still some virtuous cycle in labor markets left to go.”
Accelerating wage gains over the last year have been another sign of labor market strength. Average hourly earnings growth is forecast to hold at 3.2% on an annual basis, near the best pace of the expansion, while the monthly gain picks up to 0.3%.
Despite consistent strength across the main labor-market indicators, Trump’s threats against China and Mexico -- the two biggest trading partners -- have only grown since May jobs data were collected. Payroll growth, a lagging indicator, is forecast to slow this year as steeper levies fuel uncertainty for American businesses and consumers.
“This report isn’t going to reflect the recent escalation,” House said. “This should give you a good read of where the labor market was heading into some of these increased tensions and market jitters.”