The U.S. economy added only a net 38,000 jobs in May, according to the jobs report from the Bureau of Labor Statistics this morning. Economists surveyed by Bloomberg had projected job gains of 90,000 to 215,000 with the median forecast at 160,000.
The details below the shockingly bad headline number made ugly reading. The government statisticians revised the April job gains, already weak at 136,000, down to 123,000. The unemployment rate sank to 4.7% from 5%, but only because more Americans left the workforce. Even noting the one-time effect of the Verizon strike in May–which took 35,000 workers out of the job count–the longer term trend is decidedly soft: The economy has averaged a gain of 116,000 jobs a month for the last 12 months. That’s down from an average of 229,000 in the same period last year.
No wonder that the markets have decided that today’s jobs report takes a June interest rate increase from the Federal Reserve almost completely off the table. Odds of a June move, based on prices in the Fed funds futures market, fell back to just 4% from 22% yesterday. (The odds of a June increase were at 4% before the release of the Fed minutes for April and a series of speeches from Fed officials designed to stress the Fed’s intention to raise interest rates sooner rather than later.) Odds for a July interest rate increase fell to 31% from 55% yesterday.
Other economic news this morning supported the market’s negative conclusions about the jobs market and U.S. economic growth. The service sector index from the Institute for Supply Management fell in May to 52.9 from 55.7 in April. Anything above 50 signals expansion in the sector but the trend is in the wrong direction. The employment sub-index for the services sector fell for the first time since February.
Some of the restraint in the market’s reaction comes, I think, because investors are figuring out which way to jump. Oil was down as of 1:30–with West Texas Intermediate falling 1.63% to $48.37 and Brent dropping 1.42% to $49.33%–on the theory, I’d speculate, that slower U.S. growth, if confirmed, would mean lower U.S. demand. Yet other commodities moved up on the theory that a delay in any interest rate increase from the Fed would mean a weaker dollar–and commodities priced in dollars go up in nominal terms when the dollar falls. Following on that theory the dollar fell strongly against the euro–to 1.1341–and the yen and dropped 1.3% against the 10 currencies in the Bloomberg Dollar Spot Index.
On the same weak dollar is good theory emerging market assets climbed with the iShares MSCI Emerging Markets ETF (EEM) rising 1.35%–although I think you can make a strong case too for slower U.S. economic growth being bad for the global economy and for growth in commodity prices and developing economies in particular.
Gold climbed 2.39% to $1239.93 an ounce as of 1:30 as some investors sought a safe haven from volatility, but the VIX volatility index (VIX), which measures volatility for the S&P 500 by looking at what prices traders are willing to pay to hedge against volatility has barely moved from recent very low levels. The Vix was up just 0.81% as of 1:30 today.
With so much uncertainty in the market’s reaction to the news it’s hard today to figure out whether to go long or short and in what. Especially because there’s a very good chance that the market’s reaction on Monday, after a weekend of cogitation, will be very different than what it has been today.
“For ’tis the sport to have the engineer/Hoist with his own petard: and’t shall go hard/But I will delve one yard below their mines,/And blow them at the moon.”
So Hamlet says to his mother Queen Gertrude before setting off to England where his father expects him to meet his death.
And so says the recent action in the U.S. stock market.
With U.S. stocks bumping up against the top of the recent trading range of 2100 on the Standard & Poor’s 500 index–and near the May 2015 all-time high for the index at 2135–markets need good news to push stock prices higher. What kind of good news? Anything really that promises earnings growth in the second half of 2016. Stronger consumer spending on higher incomes. More job growth. More business investment. Stronger housing sales.
But every one of those pieces of good news also increases the likelihood that the Federal Reserve will raise interest rates at its June 15 or July 27 meetings. That’s why the unexpectedly strong news today on manufacturing has produced such a tepid response from U.S. stocks. The Institute for Supply Management’s index for the manufacturing sector climbed to 51.3 from 50.8 in April. That’s way above the median forecast of 50.3 among economists surveyed by Bloomberg. (In this survey anything above 50 indicates that the sector is expanding.) Prices (aka “inflation”) also picked up with the manufacturing index of prices climbing to 63.5, the highest level since June 20111, from 59 in March.
The next big worrisome petard (which is a bomb, I discovered) comes on Friday when the Bureau of Labor Statistics reports the jobs number for May. Economists are expecting 158,000 net new jobs although the recent strike of 36,000 Verizon workers will throw the data onto contested ground. Many on Wall Street think that 80,000 net new jobs will be enough to let the Fed march ahead toward a rate increase.
But one way or another–and with the added wrinkle of the Verizon strike and its effect on the jobs report–you can understand why no one is willing to go very strongly bullish or bearish ahead of the news.
As of the close today in New York the Dow Jones Industrial Average was up 0.01% and the Standard & Poor’s 500 stock index was up 0.11% to 2099.33. (Talk about knocking on the door at 2100.)
Concern about the future has constrained the U.S.stock market’s reaction to very good news about current consumer spending.
As of 1:30 today, Tuesday May 31, the Standard and Poor’s 500 index was off 0.15% or 3.14 points to 2095.92. The index had opened at 2100.13, just above the 2100 level that has marked the top of the recent trading range, after closing on Friday at 2099.06.
A report from the Commerce Department this morning showed consumer spending picking up by 1% in April. Wages and salaries gained 0.5%. All that argues that the U.S. economy is set to rebound after weak growth in GDP in the fourth and first quarters. Economists had expected consumer spending to climb 0.7% in April.
But the Conference Board index for May that measures consumer expectations for the next six months fell to 79, the lowest level since November 2015 from 79.7.
There’s a good likelihood that the difference between actual consumer spending and consumer worries about the next six months will get resolved in favor of actual dollars over emotions. But nonetheless, the drop in future expectations is enough to take some of the shine off consumer spending.
Add in the recognition that higher consumer spending means stronger economic growth means greater likelihood of an interest rate increase from the Fed in June or more probably July and you can understand the market’s stutter step as it thinks about breaking above 2100.
The speeches, interviews, and presentations from members of the Federal Reserve keep on coming. And they all say, “We’re prepared to raise rates soon.”
Over the weekend Eric Rosengren, head of the Federal Reserve Bank of Boston, told the Financial Times that he’s ready to back a rate increase.
The heads of the St.Louis, San Francisco, and Philadelphia Federal Reserve banks are due to speak today. (Update: In his remarks today Patrick Harker, head of the Philadelphia Fed, said he could see as many as two or three interest rate increases in 2016.)
Fed chair Janet Yellen is on tap for a speech on Friday.
All this speechifying has driven the odds for an interest rate increase at the Fed’s June 15 meeting to 32%, according to Bloomberg’s calculation, from as low as 4% before the release last week of the Fed’s minutes from its April meeting.
And all this talk makes Friday’s announcement of revisions to first quarter GDP growth even more important. Right now economists are looking for the revision to increase the growth rate to 0.9% from 0.5%. That would be a “fact” to back the Fed’s argument that the economy is strong enough to take an interest rate increase in stride. And that the first read on first quarter growth would be succeeded by stronger growth in the second half of the year.
The Standard & Poor’s 500 finished down a slight 0.21% for the day, against dropping below the 2050 level that has been support for this market recently.
This morning the Labor Department announced that the U.S. economy had created just 160,000 jobs in April. That was disappointing. Economists had expected 200,000 net new jobs. In addition the Labor Department’s statisticians revised the reports for February and March to lower by a total of 19,000 jobs. The headline unemployment rate remained unchanged–expectations were looking for a drop in the rate. The only piece of good news was continued gains in wages. The month increase came to 0.3%, spot on estimates. That brought the annual increase to 2.5%.
Under some circumstances you’d expect a weak jobs number would send financial markets higher because it would signal that the Federal Reserve will put off the next interest rate increase.
But not today. The Dow Jones Industrial Average was off slightly, by 0.07%, as of 11:30 a.m. New York time. The Standard & Poor’s 500 slipped 0.18% and and NASDAQ Composite was lower by 0.45%. The dollar was down against the yen and the euro.
And that’s because the financial markets have already priced in a one or none scenario for 2016. And when you already believe the Fed isn’t going to increase interest rates at its June meeting, getting data that confirms that belief isn’t going to move prices higher. Yesterday traders were giving a June rate increase just a 13% chance, according to the Fed funds futures market. Wednesday those odds were at 9%. Today they’re at 6%. Not a significant difference–if you’ve placed your bets, there wasn’t enough in this morning’s data to make you change those bets.
The odds for a September interest rate increase have moved down to 36% today from 40.7% yesterday.
Which leaves the market to ponder where the revenue and profit growth might come from to drive stock prices higher–if expectations for lower longer interest rates aren’t going to do that job.
The S&P 500 hadn’t retreated much as of 11:30 but the 3.61 point fall in the index was enough to take it to 2047 and below support at 2050.
Seems Goldilocks might be getting a little uncomfortable.