The shockingly weak May jobs report takes a June rate rise from the Fed off the table, slashed the chances of a July increase and in fact has raised a big question mark over any rate increase this year.
It has also raised the prospect of a higher Aussie dollar than we were looking at last week (possibly returning to around the 77 US mark in the 2016-17 budget), more confusion for the RBA to deal with here as it tries to assess the health of our economy (which is still solid).
Moreover combine the Fed’s misstep on rates and the health of the US economy with the Brexit vote in the UK on June 23, elections in Spain this month and further confusion in the US Presidential campaign and the outlook looks nervy at best.
The US created just 38,000 new jobs in May, well below forecasts for an increase of 155,000 to 162,000. It was the fewest monthly jobs added in almost six years and is one of the biggest economic shocks in the US for some time.
But adding to the gloom, the US Bureau of Labor Statistics cut the number of new jobs created in April to 123,000 from 160,000. March’s gain was lowered to 186,000 from 208,000 – a total fall of 59,000.
The jobless rate fell to 4.7%, normally a bullish sign, but that was caused by a fall in the participation rate as 458,000 people left the labor force and stopped looking for work. That is a big negative.
As well the number of people in part time work also fell for another month to be down 64,000 so far this year.
US job creation in May falls to lowest in 5-years
And should the monthly jobs reports produce a fall in the next few months then all bets will be off so far as a rate rise is concerned, even in early 2017.
What seems increasingly clear is that December’s rate rise seems to have added to the slowing pace of activity in the first quarter, which followed the sluggish three months to December when GDP grew by 1.4%, down from 2% in the third quarter and 3.9% in the three months to June.
US first quarter growth was lifted to 0.8% (annual) in the second estimate in late May, from the first estimate of 0.5%,and after Friday’s weak jobs report, some US analysts are wondering if the rate rise in December is to blame, and whether the Fed might be forced to sit on its hands now till it is convinced growth is back on track.
And even though data for April and May have indicated an uptick in activity (stronger retail sales for example), the Fed will now want to wait until the second quarter growth picture looks, even though there are signs that inflation is rising thanks to higher oil and petrol prices.
Every analyst and forecaster was blindsided by the weak report, including a clutch of senior officials from the Fed who have spent the past 10 days pushing markets towards acceptance of a rate rise this month or in July.
Most notable among the Fed heavies pushing a rate rise increase now, rather than later in the year, was Fed chair, Janet Yellen who last week said an increase would come in the next few months.
She speaks in the US tonight our time and investors will be watching her comments closely to see if she changes her tune on the timing of a rate increase or holds to her comments of last week. She probably won’t change tack, but indicate the Fed is flexible on the timing of an increase.
The jobs report hit market sentiment – the US dollar fell, the euro and the yen rose – as did the Aussie dollar – up more than a cent to 73 and a half US cents in a few hours.
Sharemarkets closed mixed in the US and Europe and investors have lost the certainty the Fed had worked hard to establish for a rate rise in the next two months.
And while employment growth was skewed by 35,000 strikers at the Verizon telco company (they returned to work late last week), adding them back into the work force produces a new jobs figure of just 72,000, the US Government”s Bureau of Labour Statistics pointed out on Friday night in the jobs report.
The Verizon workers, who were considered unemployed because they did not receive a salary during the payrolls survey week, returned to their jobs on Wednesday. They are expected to boost June employment.
Traders now see only a 4% chance of a rate hike in June, according to US analysts. The odds of a rate hike in July have fallen to 36% from 42% prior to the job report. For September, the odds of a hike are 51%, which is where opinion is now pointing.
But another weak report for June will probably see the idea of an increase in 2016 off the table.
The 38,000 jobs created last month was the smallest gain since September 2010. The Labor Department said on Friday. Employers hired 59,000 fewer workers in March and April.
There was no sign of meaningful wage growth. Average hourly earnings rose five cents, or 0.2% from April, which left the annual rate unchanged at 2.5%. The AMP’s Chief Economist, Dr Shane Oliver said yesterday that while the jobs report was a shocker, we shouldn’t read too much into one month’s figures.
"This will unnerve the Fed and means that a June hike is likely now off the table with the US money market’s probability of June hike now back at just 4%.
“July remains our base case for the next hike but it would require a decent rebound in June payrolls, so the risk is now that the Fed will be delayed to September.
However, while the May jobs report was a shocker and will impact the Fed, there is a danger in reading too much into it. As we regularly see in Australia, monthly jobs reports can be highly unreliable with occasional rogue results. Very low jobless claims tell us that the US labour market is still reasonably solid so there is no reason to wheel out the recession fears again,“ Dr Oliver said.
