- US Nonfarm Payrolls miss expectations significantly, priors revised lower as well.
- Unemployment Rate drops more than anticipated as labor market shrinks by more than 400K.
The May US labor market report wasn’t just a disappointing report, it was unequivocally the worst case scenario for the US Dollar. At 38K, the US economy added the fewest jobs since September 2010. The three-month average plunged from +181K in April to +116K in May, as another -59K jobs were lobbed off in revisions of the prior two months of data.
Disparingly, the internals of the May US labor market data did not shed positive light on why the U3 unemployment rate fell fell to 4.7% - a new cycle low. A closer look shows that the labor force has shrunk by over -800K jobs the past two months. Even adjusting for the survey quirk that counted around 35-39K Verizon workers on strike as ‘unemployed,’ there’s really no silver lining here, even if wage growth held at +2.5% y/y.
Here are the data that’s crushing the US Dollar this morning:
- USD Change in Nonfarm Payrolls (MAY): +38K versus +160K expected, from +123K (revised lower from +160K).
- USD Unemployment Rate (MAY): 4.7% versus 4.9% expected from 5.0%.
- USD Average Hourly Earnings (MAY): +2.5% versus +2.5% expected unch (y/y).
- USD Labor Force Participation (MAY): 62.6% versus 62.8% prior.
Chart 1: USD/JPY 1-minute Chart: June 3, 2016 Intraday
In the immediate wake of the data, the US Dollar slid sharply across the board, erasing much of its gains over the past few weeks (via USDOLLAR Index). EUR/USD was rather strong around the print, trading from $1.1155 ahead of the release to as high as $1.1319 at the time this report was written. Likewise, USD/JPY sank from ¥108.85 to as low as ¥107.25 . With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.
This is the type of jobs report that should give the Federal Reserve reason for pause. Markets are treating the May US labor market report like a punch in the gut to June Fed rate hike expectations. Ahead of the jobs data today, the Fed funds futures contract was implying a 22% chance of a rate hike in June. Earlier, it sunk to as low as 6%; but at the time of writing, it’s now fallen to just 2%.
This is all but the nail in the coffin for the Fed to raise rates in June, at least when viewing it from the Fed funds contract perspective. Correlation is not causation, but modern markets are adept at looking forward and discounting information; and that’s important to recognize in seeing that the Fed has never raised rates unless the Fed funds futures contract has implied at least a 60% chance of hiking rates in the front month (in this case, June).
For the Fed, this report may have also closed the window on a rate hike until at least December, if at all this year. We’ve always expressed our disbelief that the Fed would hike rates during a non-staff projections/non-press conference month, and with September being the next time the Fed would have both on the calendar after June, it seems highly unlikely that any policy tightening will be done on the doorstep of the US Presidential election. If US economic data in general turns south? I’ve raised the issue before (October 2015, April 2016, May 2016), so I’ll ask it again: at what point would the Fed consider QE4?
--- Written by Christopher Vecchio, Currency Strategist
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