As everyone knows by now, last week’s employment report from the Labor Department was much weaker than expected. The table below contains some of the key figures. The biggest disappointment was the fact that the report indicated only 38,000 jobs were added to non-farm payrolls instead of the expected number of 160,000. Despite this, the report was not as weak as this single number might imply. The Memorial Day holiday and a strike at Verizon certainly impacted the job creation number. Holiday weekends are notorious for negatively affecting the Labor Department’s estimate.
That being said, Janet Yellen’s comments at a speech on June 6th still indicate that the Fed intends to raise rates again this year but she was purposefully vague on the timing. The Fed Funds futures market is an interesting way to judge the likelihood of a rate increase. In today’s early morning trading, investors are placing a 0% chance on a rate increase in June or July. The market is indicating that there is a 26% chance of a 25 basis point increase in September and a 58% chance by the end of the year. With inflation ticking up modestly and the unemployment rate at 4.7%, the Fed has the rationale for raising rates modestly. It’s also clear they would like to normalize rates before the next recession.
How do the markets feel about this? The USD has weakened fairly significantly the last few days and the yield on the ten year Treasury note is approaching its all-time low of 1.40%. It is trading this morning at 1.65%. The stock market has been more tame and is now within striking distance of an all-time high in the US. This morning S&P 500 futures are trading 0.7% lower at the time of writing. Overall, the economy still looks healthy but growing only modestly. The next big economic releases to look out for are Retail Sales next Tuesday, Durable Goods Orders on June 24th and the June employment report released on July 8th. This should provide more clarity.
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