MrTopStep’s Index Futures Recap

Bank of America/Merrill Lynch

The May employment report was a miserable one, with only 38,000 in nonfarm payroll growth and -59,000 net revisions. The Bureau of Labor Statistics confirmed that the Verizon strike subtracted 35,000 from headline jobs, but accounting for that distortion is not enough to redeem an abysmal reading. The 3-month moving average is now a sluggish 116,000, which is close to a “breakeven“ pace of job growth. The trend looks modestly better on a 6-month moving average with job growth of 170,000. We suspect that part of the recent weakening is due to a payback from the exceptionally strong payroll gains in the winter. The unseasonably warm weather likely pulled forward activity, which is now showing up in weaker job growth.

What does this mean for the Fed?

There was no saving grace in this disappointing report, and the recent sluggishness in the labor market warrants increased Fed cautiousness. We think a June hike is off the table (and the markets agree, pricing in less than a 5% chance of hike after the number this morning).

While a hike in July is still a possibility, we are increasingly comfortable with our September call. There is simply not enough time leading up to those summer FOMC meetings to see the growth and labor data rebound convincingly, and inflation continue to accelerate–all necessary conditions for another increase in rates. After this report, Fed Chair Yellen‘s speech on Monday will be even more important.