US Non-Farm Payrolls Recap – A Colossal Disappointment

The US Non-Farm Payrolls (NFP) report for May was released on Friday, and the results could not have been much worse. At only 38,000 jobs added in May against prior expectations of around 160,000, the headline data has not been this discouraging since August of 2011. The surprisingly low number of jobs added may have been affected partially by last month’s Verizon workers’ strike, but the impact of that strike was not overly substantial, representing only a relatively minor portion of the large drop in the NFP.

To make matters even worse, April’s numbers were revised lower from an already disappointing 160,000 jobs added all the way down to 123,000. The change in average hourly earnings for May was in-line with expectations at 0.2%, but this figure showed a significant decline from the upwardly-revised 0.4% increase in April. At first glance, the only modest bright spot in Friday’s employment data was the unemployment rate, which came in at a better-than-expected 4.7% vs prior expectations of 4.9%, representing a noticeably encouraging drop from April’s 5.0% unemployment. But this was largely due to the fact that many Americans have stopped seeking jobs, dropping out of the labor market.

The immediate market reaction was as might have been expected given the huge decline in jobs added last month. The dollar proceeded to plunge precipitously, reversing much of its gains within the past few weeks, while gold surged sharply, breaking its losing streak of last month. US and European equities also fell sharply as the markets digested the dismal employment figures.

What are the potential implications of this disappointing NFP data? The clearest outcome should be that a June rate hike by the Federal Reserve is likely to be taken off the table altogether. With both the large NFP miss on Friday along with the risk of a possible UK exit from the European Union coming later in June, it is extremely doubtful that the Fed would even think about raising interest rates in June. As for July, the likelihood of a rate hike has also decreased dramatically. With US employment lagging much more than expected, the Fed would be hard-pressed to consider raising rates at all this summer, unless a dramatic turnaround occurs sometime before the July FOMC meeting. A July rate hike should also be contingent, of course, upon the UK voting to remain in the European Union on its June 23rd referendum.

As of Friday after the NFP release, the Fed Fund futures market showed a plunge in the implied probability of a June rate hike to as low as sub-4% from around 20% prior to the release. For July, the implied probability fell from around 60% down to the 35% level. The next date for a possible rate hike decision will be during the FOMC’s late-September meeting, which has also shown a sharp decrease in implied probability. Clearly, the impact of Friday’s Non-Farm Payrolls has been severe and far-reaching with respect to the financial markets, and should continue to affect the markets as the Fed incorporates these numbers into its near-term monetary policy outlook.

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