Below trend growth to continue
Looking at the spectrum of forecasts ahead of the release, the 38k print for May was 52k lower than the lowest forecast surveyed by Bloomberg while consensus was at 160k.
Yeap, whichever way you cut it, Friday’s US non-farm payrolls (NFP) was a shocker. Looking at the spectrum of forecasts ahead of the release, the 38k print for May was 52k lower than the lowest forecast surveyed by Bloomberg while consensus was at 160k. Adding salt to the wound, the previous two months readings were revised down by a net 59k and although unemployment rate fell to 4.7% from 5%, this was due to people leaving the work force rather than an increase in hiring (the participation rate fell to 62.6% from 62.8%). Meanwhile, average hourly earnings came in line with expectations, growing at 0.2% in May, leaving the annual growth unchanged at 2.5%.
Friday’s US data disappointments was not limited to the employment report, one hour and a half later the market got another kick in the guts with the US non-manufacturing ISM report showing a fall in May to 52.9 from April’s 55.7 (consensus 55.3). The details of the report were also soft. The employment index fell to 49.7 from 53, new orders slowed to 54.2 from 59.9 and business activity eased off to 55.1 from 58.8.
While currency and bond markets were mostly range trading ahead of the NFP report, US equity markets were drifting higher. The NFP report triggered a USD sell off against all g10 and most EM currencies. JPY, NZD and SEK were at the top of the G10 leader board up around 2.2% while AUD and EUR were closely behind at 1.9%. CAD and GBP were at the bottom at 1.2% and 0.7% respectively. The AUD ended the week at 0.7367 and the NZD closed at 0.6958.
US equities ended Friday in negative territory (S&P500 0.29%, DJ -0.18,NASDAQ -0.58%), however they did manage to stage a recovery late in the session. Presumably on the view that a lower for longer Fed is good for equities as long as the US economy does not fall off the wagon. The fall in European equities was larger (Eurostoxx50 -1.20%, DAX -1.03%), but the late US recovery suggests there might be some upside for Monday’s Europe opening.
Core global yields also ended Friday lower and unsurprisingly the largest falls were recorded in the front end of the US Treasury curve. 2y and 5y UST closed 12bps lower at 0.774% and 1.232% respectively. 10y UST fell by 10bps closing at 1.701% and looking vulnerable to the downside. 10y Bunds ended at 0.068% (-4.7bps) and 10y UK gilts closed at 1.276% (-7bps), both making a new record lows.
As for commodities, oil prices were relatively steady. WTI and Brent closed at $48.90 and $49.84, losing 0.33% and 0.22% respectively. Gold was a big winner, up 2.83%. Iron ore also recovered some ground gaining 3.94% and finishing the week back above the $50 mark (at $50.04)
Rob Henderson, our retired chief economist, would often say that ‘one swallow doesn’t make a summer’ and as such one ‘odd ‘data print does not necessarily indicate a new trend. Those that remain bullish on the US economy would probably be quick to point out that the economy has still generated an average of 116k jobs per month over the past three months. Furthermore, many would suggest that the weakness in US jobs growth in May represents a delayed response to the sharp economic slowdown in late 2015 and Q1 2016. Therefore the impact should only be temporary. All valid points, but in the past year the market has been bitten more than once. Last month’s uptick in the USD and rise in US treasury yields was largely driven by the release of the hawkish April Fed minutes, along with hawkish rhetoric from Fed speakers. Now, even if Fed speakers keep drumming up expectations of more than one rate hike for 2016, we suspect the market will be reluctant to follow until the data ratifies this view.
Over the weekend Fed Mester (hawk-voter) said the Fed should raise interest rates gradually despite weak jobs data while Fed’s Brainard (dove-voter) said US jobs report was sobering and global risks still warrant caution.
The market is likely to open battered and bruised on Monday, suggesting investors should take a breather at the open. However reaction to Asia’s equity markets will be important, particularly given that US equity staged a decent recovery on the later session on Friday. That said, we expect a limited response as the market waits to see if Yellen retains her hawkish pre NFP view when she speaks Monday night (Tuesday 2:30am AEST).
As for data releases, this morning in Australia we get the MI inflation gauge, NZ is out celebrating the Queens birthday Fed Rosenberg speaks in Helsinki (16:00 AEST) and the US gets its May labor markets conditions index print.
On global stock markets, the S&P 500 was -0.01%. Bond markets saw US 10-years -9.85bp to 1.70%. In commodities, Brent crude oil +0.20% to $49.84, gold+2.7% to $1,245, iron ore +3.5% to $50.08. AUD is at 0.7369 and the range since Friday 5pm Sydney time is 0.7236 to 0.7387.
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