As we noted earlier this week, a Fed rate hike in less than two weeks’ time was basically a “done deal” heading into today’s Non-Farm Payrolls report (see “Sector showcase: The utility of utilities for handicapping the Fed” for more). When the jobs figures were released, at least a few traders had to reevaluate that outlook.
On a headline basis, the US economy added “only” 138k jobs in May, below expectations of about a 180k gain. Adding insult to injury, 66k jobs were revised away from the previous two months’ reports, meaning that the US economy has generated 100k fewer jobs over the last three months than economists had been expecting less than an hour ago.
While the unemployment rate did tick lower to 4.3%, the drop was driven by a retreat in the labor force participation rate from 62.9 to 62.7%; in other words, it was a “bad” decline in unemployment, caused by fewer US citizens looking for work rather than a big gain in US citizens with jobs.
Beyond the disappointing “quantity” of jobs created, the “quality” of those jobs was decidedly mediocre. The closely-watched average hourly earnings figure rose 0.2% m/m to a 2.5% annualized rate, in-line to slightly below expectations. Average weekly hours worked held steady at 34.4. In a concerning sign for the Trump agenda, manufacturing employment actually fell for the first time this year.
In terms of the market reaction, US stock futures have given back the majority of their overnight gains, though remain barely in positive territory ahead of the open. The benchmark 10-year bond yield is trading lower by 4bps on the day, and the US dollar index has shed half a point to trade back below 97.00, at its lowest level since the US election.
Of course, we’re hesitant to read too much into a single, volatile data point, but at the margin, today’s weak-but-not-abysmal jobs report decreases the likelihood of aggressive interest rate hikes from the Federal Reserve later this year (i.e. three more increases this year is looking increasingly unlikely). More immediately, the central bank still appears likely to raise rates at its meeting in 12 days’ time, but the odds of a “dovish hike” are certainly on the rise.
