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    Dismal May Payrolls Crush Fed Rate Hopes

    The May employment report was so bad and unexpected just as the economy appeared to be improving from two slow quarters that the analytical reflex is look for balance in the discouraging picture it painted of the American labor market.

    Companies added just 38,000 new positions, the smallest number is almost six years and the figures from the prior two months were revised lower by 59,000. This cut the three month job figures to 116,000, barely half the 219,000 average of the past year. Economists had forecast 160,000 new jobs.

    Though the unemployment rate dropped to 4.7 percent it was not because more people had found work but because 458,000 people left the work force and are no longer counted as unemployed by the Bureau of Labor Statistics. This decline was mirrored in the labor force participation rate which fell to 62.6 percent just 0.2 percent above the 40 year low of last September.  The unemployment rate had been predicted to hold steady at 5.0 percent. 

    The one positive point was wage growth. Average hourly earnings rose 0.2 percent on the month and 2.5 percent on the year, both as expected, reinforcing the sharp run-up from 2.0 percent over the past 11 months and the 2.1 percent average during the last seven years.

    Average weekly hours were unchanged at 34.4. Analysts watch this number for signs that employers may need to increase staff. Hours per employee often rise before firms decide that more workers are needed. This statistics has been stuck in a tight 34.3-34.6 range for almost four and a half years. 

    Markets were looking to the report for confirmation that the U.S. economy was strong enough to permit the Federal Reserve to raise interest rates in June for only the second time in a decade.  

    Several Fed governors and Chair Janet Yellen have been quite public in their desire to resume normalizing rates, which had been at 0.25 percent upper target for seven years from December 2008 to December 2015 and 0.5 percent since.  

    Market reaction to the report was swift. The probability of a rate increase at the June 15th FOMC meeting, computed by Bloomberg from the Fed Funds futures, fell immediately to 8 percent. It had been close to 30 percent before the release. The probability for an increase at the July 27 the meeting, which had been hovering near 50 percent, faded to 28 percent.  The chance of a hike does not rise to better than even until the end of the year at the December 14th meeting.

    Credit markets responded sharply as did the dollar. The yield on the 2-year generic Treasury lost 11 basis points to 0.7756 percent as of 3:23 pm in New York, erasing all of the gains subsequent to the Fed intimations of higher rates. The 10-year yield lost 10 basis points shrinking to 1.7039 at 3:27 pm, its lowest in three weeks.

    The dollar dropped against all of its major trading partners as the likelihood of a rate hike this year, which had been increasingly priced in, drifted into the indeterminate future.

    The U.S. currency lost 2 percent against the euro, as the European currency climbed from 1.1150 before the release to 1.1352 in late afternoon trading. The dollar also lost 2 percent versus the yen, falling from 108.86 to 106.62 at 3:38 pm, with about half the losses coming in the first 15 minutes after the payroll numbers. 

    Equities initially saw substantial declines. The S&P 500 dropped 19 points, retreating from its seven month high in the first two hours of trading to 2085. But by the end of the day it had recovered to a 6 point loss at 2099.13.  The Dow Industrials at first lost almost 150 points to a low of 17689. But here also, buoyed perhaps by the supportive prospects of indefinite near zero rates, the Dow ended down just 31.50 points at 17,807.06.

    Gold posted its biggest gain in eleven weeks, jumping $33.10, 2.73 percent to $1,244.19 at 4:00 pm. 

    Jobs growth in May was centered in the private sector, with 25,000 additional jobs. Government payrolls grew by 13,000. The telecommunications sector lost 37,200 workers due mostly to a Verizon Communications strike throughout the survey period, since settled.

    The mining industry, which includes oil and gas drilling and exploration, continued to dismiss workers, shedding 10,200, despite months of jobs losses. Construction trades posted the second straight month of declines, eliminating 15,000 jobs. The education and health sector added 67,000 jobs.

    In May, 7.4 million workers who wanted a full time job did not have one.  The government’s broad measure of unemployment, officially the u-6 rate, that includes folks working part-time who want full time employment and have looked for work in the past twelve months, held steady at 9.7%, unchanged from April.

    May’s payrolls may have dashed the Fed’s hope for midsummer rate increase. In retrospect it is somewhat surprising that the Fed governors decided to take their rate desires public last month when there were several indications, even then, that all was not well in the labor market.

    But even two poor months may not dissuade the Fed from its chosen path if the June payroll report, due July 8th, can show substantial improvement.  

    Though U.S. economic growth has recovered from its 1.1 percent swoon in the last two quarters, prospects for the current quarter are uncertain at best.

    Overseas economic growth from Japan to Europe, Brazil and emerging markets has slowed to a crawl or is in recession.  Economic headwinds of unknown force are blowing from China.

    In that context, Beijing’s 1.5 percent devaluation of the yuan against the dollar in the past two months has to have alarm bells ringing at the Fed headquarters in the Eccles Building.  

    If U.S. growth starts to ebb from here, the Fed will need far more than the 0.5 percent interest rate cut now available to head off a recession.

     

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg


     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Companies added just 38,000 new positions, the smallest number is almost six years and the figures from the prior two months were revised lower by 59,000. This cut the three month job figures to 116,000, barely half the 219,000 average of the past year. Economists had forecast 160,000 new jobs.

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