Non-Farm payrolls missed expectations to print at +75,000 in May, far less than the 178,000 median forecast on Bloomberg.
Revisions to previous months were net negative by 75,000. Average earnings were up 0.2%, compared to 0.2% monthly growth in May and up 3.1% year on year.
On the surface, it certainly looks like there is enough bad news in this report to perpetuate the current dominant narrative of a slowing US economy and dovish Fed.
The headline miss, together with a lack of any noticeable acceleration in wage growth, means that these figures have little in them to suggest the Fed’s recent dovish turn will be reversed any time soon.
However, these figures don’t justify expectations of three rate cuts from the Fed in the next year. Slowing headline job growth and accelerating wage growth are what you’d expect from a late-cycle economy like the US.
In contrast, fixed income markets are pricing for a significant slowdown in growth, less wage growth and a weakened inflation outlook, and even rate cuts from the Fed as early as this quarter.
Today’s report does not validate this narrative, but it certainly sets the stage for further USD selling and lower fixed income yields, particularly if next week’s Retail Sales and Inflation data also miss expectation
Ultimately, today’s non-farms report is only slightly below expectations and in different circumstances could well be dismissed as consistent with a late cycle economy where job growth is slowing but wages are holding up.
EURUSD heads higher as broad US dollar sell off deepens
Two additional risks loom over the US economy and weigh on market sentiment
There is an element of self-perpetuating gloom from the fact that the US sovereign curve is inverted over the 3 month-10 year horizon.
This has been a reliable indicator of recession in the past and remains concerning even though the strength of the signal today has been distorted by low global yields after decades of central bank asset purchases.
The real threat to the US and global economy, as well as financial markets, remains the erratic and dangerous trade policy of the Trump administration.
As bearish as current market pricing is for the US, it’s still well short of how bad things could potentially get if the US simply followed through on the current full suite of current threats against China and Mexico.
When viewed in this light, current expectations of a bearish Fed start to make sense, or even look optimistic.