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06 03 2016 | by Victor Xing | Capital Markets

May Payrolls: policy normalization, interrupted

May Payrolls

The anemic May Payrolls shattered market participants’ optimistic rate hike expectations.  The 158,000 consensus expectation was previously viewed as a low bar even factoring in temporary labor disruptions (Verizon strike), but the survey figure now towers over the meager realized gain of 38,000.  To make matters worse, job gains in the prior two months were revised down by 59,000.

Details within the latest report were disappointing.  Labor market participation rate declined in both the aggregate and prime age (25-54) categories, and a smaller labor force pushed down the U-3 unemployment rate to 4.7% vs. 5.0% prior.  The broader U-6 unemployment rate stood unchanged at 9.7% to better reflect marginally attached and part-time workers for economic reasons – figure for the latter surged to 4.06% (as a percent of the labor force) vs. 3.75% prior to erase progress made since September 2015.

May Payrolls
Part-time workers for economic reasons (involuntary part-time workers) rose, U-6 unchanged, U-3 declined from 5.0 to 4.7 as the labor market shrunk
May Payrolls
Aggregate labor market participation rate continued April’s decline at 62.6% vs. 62.8% prior, prime age participation rate at 81.0% vs. 81.2% prior
May Payrolls
Percent of long-term unemployed declined further, but it is uncertain whether this is due to workers given up (leaving the labor force and do not count toward the unemployment rate)
May Payrolls
Average hourly earnings largely on-consensus with monthly gains at 0.196% MoM vs. 0.2% consensus

Market reaction and Fed Governor Brainard’s dovish comments

Market reacted to today’s data by immediately pricing out the probability of June hike, and market-implied rate hike probability for the rest of 2016 declined to 84%.  This is the level before the above-consensus April CPI, hawkish comments by Atlanta Fed President Lockhart, and the more hawkish than expected April FOMC minutes re-flattened the curve and weakened the front-end.

May Payrolls
Fed funds futures rallied following today’s jobs print

Fed Governor Brainard spoke next.  She began her speech with references to the “sobering” jobs data, highlighting the rise in involuntary part-time workers, lower participation rate, “modest” wage growth, as well as downside risks to inflation in addition to foreign risks (Brexit, China) as reasons for prudence and further “watchful waiting.”

May Payrolls
2 year Treasury futures staged a strong rally
May Payrolls
5s rallied 11 bps
May Payrolls
Dollar strength evaporated following the data release

Sector specific analysis

May NFP – major categories (changes in thousands):

  • Trade, Transportation and Utilities: 0 vs. 6 prior
  • Education and Health Services: 67 vs. 46 prior
  • Professional and Business Services: 10 vs. 55 prior
  • Leisure and Hospitality: 11 vs. 11 prior
  • Manufacturing: -10 vs. 2 prior
  • Financial Activities: 8 vs. 18 prior
  • Construction: -15 vs. -5 prior
  • Information Services: -34 vs. 3 prior
  • Mining and Logging: -11 vs. -11 prior
May Payrolls
Education and Health Services was the only major sector which posted a large gain – all other sectors saw declines

The Professional and Business Services sector has been the bulwark of post-08 labor market recovery, but weakness is seen in the “peripheral” services professions – Administrative and Support Service, Management of Companies and Enterprises, and Waste Management and Remediation Services all posted large declines – and this followed WSJ’s article on the slowdown in hiring by staffing agencies:

Hiring by staffing agencies has ground to a halt so far in 2016, a worrisome sign because the category fell off before a broader job-market slowdown ahead of the past two recessions. Many economists look at the sector as a leading indicator because cautious firms tend to first hire temps when an expansion begins and dismiss those nonpermanent workers when they sense the economy is faltering.

May Payrolls
Admin & Support Services led the decline in Professional and Business Services

The Leisure and Hospitality sector saw a decline in two of its three biggest sub-categories.  Food Services and Drinking Places rose, while Accommodation plus Amusements, Gambling, and Recreation fell.

May Payrolls

The long-battered Mining and Logging industry is showing some signs of stability – monthly changes in Support Activities for Mining (largest sub-category) is still negative, but it appears to be stabilizing.  Mining, Except Oil and Gas declined a touch.

May Payrolls
Mining sector is still soft, but it appears to be stabilizing


Next article05 31 2016 | by Victor Xing | Capital Markets

April PCE: strong gains in energy and goods