Hiring Surges in May

MACRO FRAME

Global equity markets appear to be treating US-Iran talks to reopen the Strait of Hormuz as a done deal, leaving Friday’s labor report as the key risk event in its potential Fed policy implications.

STOCK INDEX FUTURES

Equity index futures were mixed following today’ surprise nonfarm payrolls report; Total nonfarm payrolls rose +172,000 in May, essentially in line with the upwardly revised April gain of +179,000. The unemployment rate held steady at 4.3%, unchanged from April and within the narrow 4.3%–4.5% range it has occupied since July 2025. The labor force participation rate was flat at 61.8%, and the employment-population ratio was little changed at 59.2%. The report included meaningful upward revisions: March was revised up +29,000 (from +185K to +214K) and April up +64,000 (from +115K to +179K), adding a combined +93,000 jobs to the prior two months. This is a significant catch-up and materially improves the picture of spring labor market momentum. Following the string of strong payrolls data, the Fed appears well positioned to combat the surge in inflation, perhaps having more room to hike rates if necessary.

US DOLLAR: The USD index was down 0.21% to 99.20, in the 99.00-99.30 range is has maintained since mid-May before of today’s nonfarm payrolls data. Several counter-acting forces are at play, largely being the inflationary backdrop and resulting Fed expectations alongside risk-on flows away from the dollar as expectations of an extended ceasefire grow. A Reuters poll on Wednesday showed that FX strategists expect the dollar to remain range-bound in the near term before ultimately weakening later in the year. Since the conflict began, the dollar has been a gauge for broad risk sentiment. The main driver of dollar weakness remains risk-on flows in the face of market optimism over an end to the conflict in the Middle East, which markets expect would drop a growing hawkish bias from the Fed.

Watch point: Currency markets are in wait-and-see mode ahead of Friday’s labor report and any further developments between the US and Iran.

EURO: The euro was 0.23% higher at $1.1637 before today’s nonfarm payrolls data. Eurostat’s third estimate of Q1 2026 eurozone GDP was revised down to -0.2% QoQ, a notable downgrade from the +0.1% reading in the earlier estimate. On an annual basis, growth slowed to +0.3% year-on-year, a sharp step down from the +1.2% pace previously recorded. The euro continues to trade opposite oil prices. Inflation data on Tuesday reinforced the case for policy tightening at the European Central Bank’s June meeting. Money markets fully expect a hike at the June meeting and see 64 bps of tightening by year-end. However, a potential facto which could limit the need for additional policy tightening after June, would be that services inflation eased in the most recent data. Given that services represent nearly 47% of the inflation basket, the central bank should find some relief regarding the overall inflation narrative. The ECB maintains the scope to tighten policy without worrying about impacts to economic growth, though the extent to which policy tightening is necessary may be limited to just one rate hike if the Strait is reopened within the month and if services inflation does not pick up. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable given the recent shift in Fed expectations.

Watch point: While a June rate hike is expected from the ECB, a peace deal and restoration of oil flows through the Strait is likely to reduce tightening expectations.

BRITISH POUND: Sterling rose 0.35% to $1.3469 before today’s nonfarm payrolls data. Despite a dovish repricing of Bank of England expectations, the sterling has gained as a result of the reduction in geopolitical risk and decline in demand for the dollar. While a peace deal would see the pound strengthen on the back of risk-on flows, that would also open the door for a resumption of policy-easing from the BoE later in the year and lend focus back to the economic and political challenges, which were initially pressuring the currency. A fully priced rate-hike has been priced out to November, while a second rate hike is expected in April 2027. Recent weak economic data has tempered interest rate hike expectations and reinforced our view that the BoE has limited scope to tighten policy. We also suppose that money markets are overzealous in pricing rate hikes from the BoE and expect no upwards policy action from the central bank.

Bank of England Governor Andrew Bailey has suggested that the Bank of England has no immediate desire to move on policy, as Bailey said that allowing inflation to run above the BoE’s 2% target was justified given uncertainty over the economic impact of the Iran war and the weak pace of growth. Political risks still pose as a potential downside risk for the pound despite having eased in recent weeks. Mid-June’s Makerfield by-election remains a potential catalyst that could renew discussions over fiscal policy and see Starmer’s leadership challenged.

JAPANESE YEN: The yen is little changed at 159.89 yen per dollar after testing the 160 level overnight, which prompted another warning from Finance Minister Katayama, who said Japan was ready to respond at any time and reserved the right to take “decisive action” against excessive volatility. Traders are likely not willing to take challenge official buying from the Bank of Japan or Japanese Treasury ahead of today’s nonfarm payrolls data, as the government has shown a willingness to intervene. Despite the risk of intervention, traders have built the largest short yen position since July 2024 in recent weeks. Without a meaningful shift in the policy outlook and economic growth, the yen is likely to maintain its 157-159 range. Money markets continue to expect a rate hike come June, pricing a 81% chance of a hike, up from 70% on Tuesday. The market sees a total of 43 bps of tightening by year-end. Intervention risk continues to offer the currency support near the 160 level. While a sharp rebound in the yen appears unlikely at the time being, the yen appears to be slightly undervalued given the Bank of Japan’s bias toward hiking rates and government intervention support.

AUSTRALIAN DOLLAR: The Aussie was 0.11% higher at $0.7142. before today’s nonfarm payrolls data. Trade data for April showed Australia logged a near $1.8b trade surplus in the month, above forecasts of $1.2b. Q1 GDP rose by 0.5%, while annual growth held at 2.5%, the figures were in line with forecast. Largely, demand is still outpacing supply, labor conditions remain tight, leaving inflation conditions pointed upwards. While the RBA has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year, markets are still expecting one more rate hike by the end of the year. Trimmed mean measure inflation sits at an annual pace of 3.4%, which is likely to reinforce a tightening bias from the RBA. Markets have slashed tightening expectations in the near term, implying a 7% chance of a June hike to the 4.60% cash rate, while a December hike is priced at 67%.

TREASURY FUTURES

Yields sharply higher across the curve following today’s nonfarm payrolls data. Treasury markets continue to take directional cues from oil prices, as a sustained move higher in crude would carry the greatest risk of re-anchoring embedded inflation expectations at elevated levels. The 10-year yield has tracked the trajectory of December Brent crude closely over recent months, though there are emerging signs that this correlation is beginning to soften.

Watch point: The path to loosening has appears nonexistent as inflation has evidently become more broad based. We no longer expect the Fed to lower rates in 2026 as building inflationary pressures are evident in stickier readings.

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