May’s Employment Report delivered an unexpected and highly disruptive blow to the economic narrative and interest rate flight path that many analysts, including myself, have been calling for in recent weeks.
In many respects the report was a perfect storm for those looking for a sign of further momentum in our economic expansion
In brief, US companies added only a fraction of the jobs (+38K) that were expected in the month of May (+160K). The official unemployment rate dropped to 4.7%, a post financial crisis low, but that data point was largely glossed over by the street because of the rise in the number of those dropping out of the work force. The weakest monthly jobs gains in five years underscored the sense shared by a minority on the street that the economy is headed for a slowdown later in the year. Adding to a sense of foreboding delivered in the report were the unexpected revisions lower in employment roles in the previous months of March and April. In total, those downward revisions were 59K.
Obviously, the reverberations of last Friday’s massive miss of the May employment report will continue to drive the near term tone and direction of markets from currencies and commodities to equities and debt. On Friday, after a tumultuous start, equity markets managed to firm and ultimately rally into the afternoon. Rally aside, all three majors lost ground on the day with the Nasdaq (-0.58%) bearing the brunt of the selling. The S&P 500 slipped 0.29% and the Dow Industrials gave back 0.18%. Volume on the NYSE rose (1.99%) while it fell on the Nasdaq (-1.11%).
The fact that equity markets managed to claw back much of the ground lost in the early going is an indication that the May Employment Report did provide some data that ran counter to the headline miss. At least in part, the Verizon strike was responsible for 35K missing jobs. That strike has been settled. Other data points that would normally buttress and confirm a broader slowdown in economic activity have not been present in recent data as evidenced by last week’s jobless Claims and ADP Report.
Wage growth as measured by the Average hourly Earnings component of last Friday’s Employment Report was solidly positive. Wages gained ground in the month by increasing to $25.59/hr., up 5 cents. Earnings have risen 2.5% on a year-over year basis, well ahead of inflation. The increase in wages augments the thesis that the official rate of unemployment suggests. We are reaching near full employment. The closer we get to full employment, the more difficult if will be for the economy to post sequential gains in employment – as we have seen for the past record breaking 75 months.
Naturally, the miss in May’s Employment report was most directly felt by the financial sector given that the presumed move in rates will now almost certainly be pushed back later into the calendar year.
The XLF on Friday, for example, lost 1.43% on the session after have been 2.5% lower in the early going. The delay in a rate rise by the Fed effectively translates into a delay in improving net interest margins (NIM) for financials.
Now that some of the air has been taken out of the market, investors will be treated to a rather benign economic calendar this week.
Chair Yellen will speak twice today and Eric Rosengren spoke in the overnight in Finland about jobs report and rate hikes Reuters – but otherwise no Fed officials are scheduled to speak this week. From an economic data perspective, this week is soft. Investors will be keeping an eye on Great Britain.