US: Weak jobs report makes a summer hike very unlikely – Danske Bank

Senior Analyst, Mikael Olai Milhøj at Danske Bank, suggests that there was almost nothing good in the US jobs reports for May – and remember the jobs report for April was not strong either.

Key Quotes

“Employment rose only by 38,000, the lowest since 2010 (dragged down 35,000, however, by a Verizon strike). The two-months revisions were not good either, totalling -59,000 and making the weak April jobs report even weaker. The unemployment rate declined significantly from 5.0% to 4.7% but it was due to a shrinking labour force (the participation rate declined from 62.8% to 62.6%) and not higher employment.

The one good spot was the earnings data as average hourly earnings rose +0.2% m/m in May in line with recent trends. The April rise was revised up to 0.4% m/m from 0.3% m/m. Wage inflation was unchanged at 2.5% y/y in May.

Based on the weak jobs report, we think a summer hike is now very unlikely. Although other data releases have been quite good, suggesting that the US domestic economy has picked up pace, we think the jobs report for May will weigh substantially on the Fed’s rate decision. One of the most important input factors in the Fed’s reaction function is employment.

It is not easy to find good explanations for the weak report. Two negative reports in a row could be a warning that the economy is slowing. Overall, and given other strong economic data, we do not think this is a sign of a significant slowdown in the US economy – at least we need more data to support this.

We stick to our view that the Fed will hike in September but we need to see a rebound in employment so risk is skewed towards a later hike. The probability of a June hike according to market pricing has fallen from around 30% to 10%, July from 70% to 40% and September from around 85% to 60%. A hike this year is no longer fully priced in (all numbers are approximations).

On Monday, Fed chair Yellen is speaking in Philadelphia and despite the weak employment data, the speech will likely attract much attention, as we enter the Fed’s silent period ahead of the June FOMC meeting. Also notice that Yellen testifies on monetary policy to the Senate Banking Panel on 21 June, not a long time before the July FOMC meeting.”