Labor Market Slows; Rate Hike Forecasts Are Pushed Out

Last week’s widely anticipated Non-Farm Payroll release from the Bureau of Labor Statistics was a major disappointment. The headline gain in payrolls was just 38k, and the reports for the prior two months were revised downward by a combined 59k. The weakness was broad-based across labor sectors. Although the unemployment rate ticked down to 4.7%, this was driven by a decline in the participation rate to 62.6% from 62.8%. Meanwhile, the broader underemployment rate remained constant at 9.7%. Given that the labor market was one of the major arguments supporting a hike at next week’s FOMC meeting, this softer read on the sector will certainly give committee members pause as they debate their next move. To compound the decelerating data, the ISM non-manufacturing release missed expectations, printing at 52.9 versus the 55.3 consensus. The Treasury market rallied significantly on the release of these data sets, while the dollar dropped in value and futures market pricing indicated that the odds of a 0.25% hike at the June meeting declined from 22% to just 4%. SNWAM continues to believe that the U.S. economy will grow at a moderate pace, similar to that which has been established over the last couple of years, and additionally that inflation pressures will remain subdued. This, among other factors, will continue to support a range-bound interest environment in the near to medium term.

Source: Bloomberg, CRT