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Dashboard update summary:
The employment summary released on Friday was surprisingly weak, with only 38,000 new jobs added to the U.S. economy during May and previous month figures revised down. The BLS estimate was dramatically below consensus forecasts. Many macroeconomic indicators remain positive and in line with Fed targets; households have been spending and investing more and inflation is above one percent. However, the surprise job growth weakness is sufficient to delay the expected timetable for Fed interest rate hikes.
Macro: GDP revised upward but business investment still strongly negative
In the second estimate, 2016 Q1 U.S. real gross domestic product (GDP) growth was revised upward to 0.8 percent from 0.5 percent. Private inventory investment did not decrease as much as previously estimated. Gross domestic investment from businesses remains strongly negative, following negative corporate profits in 2015 Q4 and very low profits in 2016 Q1. Slow real GDP growth is a result of the offset of negative business investment on sound household data. Household incomes increased in April, while expenditures decreased slightly in real terms but remain strong.
Jobs day disappoints
Economists’ consensus view that between 100,000 to 200,000 jobs were added to the U.S. economy in May was met on Friday with a surprisingly paltry 38,000 increase estimate from the BLS. The weak data was surprising enough to cause large immediate jumps in bond and foreign exchange markets.
Meanwhile, the headline unemployment rate fell to 4.7 percent from 5.0 percent, the largest decrease in several months. The fall in the headline rate had more to do with people “leaving the labor force” than with the addition of new jobs, unfortunately. The labor force participation rate fell to 62.6 percent in May. Many of those who left the labor force had been unemployed for 27 weeks or more and where therefore discouraged enough to stop trying to find a job.
Bond and FX markets react
Treasury bill and bond constant maturity yields fell in response to the expected delay of interest rate hikes. The yield curve (see below a simple visualization) remains relatively low and flat. The real yield on a five year treasury, for example, fell to -0.22 percent on Friday, June 3. Foreign exchange markets saw an almost universally stronger U.S. dollar in response to the jobs report. The dollar closed roughly two percent weaker against the Euro, Yen, Australian Dollar, and Ruble, roughly one and a half percent weaker against the Swiss Franc, Brazilian Real, Turkish Lira, and Malaysian Ringgit, and more than three percent against the South African Rand.
Rate hike delay
While U.S. macroeconomic data has not been thrilling, labor market strength and wage increases were, in the previous few months, supportive of a June Fed Funds target rate increase of a quarter point, to 0.5-0.75 percent. The new jobs report, therefore, softens the strongest pillar. Markets have basically taken a June hike off the table. The next jobs report will be watched very closely and will likely determine whether a July hike is appropriate. Given the timing of Fed meetings and the expected gradual increase rate, it is more likely that we only see one rate hike during 2016.
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