Fed unlikely to alter rate hike plans despite weak payrolls

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Summary:

  • Nonfarm payrolls employment rose 138k in May, missing forecasts of 184k
  • March and April payrolls revised down by 66k
  • Unemployment rate falls to a 16-year low at 4.3%
  • Underemployment slips to 8.6% a new cyclical low
  • Wages stable at 2.5% YoY

The Bureau of Labor Statistics (BLS) released the monthly employment situation report. Official data showed that the US economy added 138k jobs month on month in May. This was significantly lower than the 184k forecast that the markets were expecting.

U.S. Nonfarm payrolls: 138k, May 2017
U.S. Nonfarm payrolls: 138k, May 2017

Previous two-month data (March and April) also saw a cumulative downside revision of 66k.

While the payrolls disappointed, the US unemployment rate fell to a historic 16-year low at 4.3%, down from April’s 4.4%. The decline in the unemployment rate puts it below the Fed’s median estimates for full employment which currently stands at 4.7%.

May jobs report was weaker but it will not stop the Fed from hiking interest rates on June 14

In the past year, the jobless rate has dropped from 4.7% to 4.3%.

Wages were also a bit disappointing after the initial expectations set by the ISM manufacturing PMI and the Fed’s Beige book report. Average hourly earnings rose just four cents on the month bringing the year over year earnings to 2.5%.

The official jobs report was also sharply in contrast to the private payrolls released earlier in the week. ADP/Moody’s reported that private sector hiring rose to 235k jobs during the month of May. This had potentially raised the prospects of stronger jobs report in May.

The average earnings were also revised down to 2.5% for March, from the previously estimated 2.6%.

Will Fed change its plans?

While the overall data from the labor market painted a dull picture, the data is unlikely to dent the Fed’s plans for a rate hike this month. So far, various indicators suggest that the labor market is still healthy at this stage in the cycle. But there is no denying the fact that job creation has slowed and has been disappointing for the second month in a row.

Alongside the jobs report, the subdued inflation with the core PCE at 1.5% is also likely to the put the Fed on alert, but the longer-term expectations for one more rate hike (after June) are still on the cards.

Lael Brainard, FOMC governor, mentioned last week that if inflation doesn’t show signs of rising, it could alter her view on the monetary policy tightening. At the previous FOMC meeting, officials brushed aside the weak patch of data from April, but this will be difficult to ignore this time.

September rate hike?

Still, the chances for another rate hike from the Fed in September is quite likely provided there is evidence of inflation picking up and wage pressures rising.

For the moment, however, some are already writing off a September rate hike, and this could potentially further dent the sentiment in the US dollar.

Following the disappointing data, the US dollar weakened into Friday’s close. EURUSD pushed to a fresh 7-month high, closing at $1.1281 as a result. The second quarter GDP tracking was promptly revised lower by the Atlanta Fed.

The GDPNow model from the Atlanta Federal Reserve was revised down from 4.0% previously to 3.4% because the jobs report.

AtlantaFed GDPNow Q2 U.S. GDP tracker: 3.4% (June 2nd 2017)
AtlantaFed GDPNow Q2 U.S. GDP tracker: 3.4% (June 2nd, 2017)

Looking ahead, this week is rather slow as far as data from the US is concerned. However, with the ECB meeting scheduled for this Thursday, June 8th the US dollar could see some volatility especially with hawkish expectations from the ECB where forward guidance is expected to show an upbeat assessment of the economy and a tightening as a result.

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