Market wrap: nonfarm payrolls, a meagre +121k three-month average - Westpac

Analysts at Westpac's market wrap ...

Key Quotes:

"Global market sentiment: A disappointing US jobs report hurt the US dollar and pushed bond yields lower. Equities shrugged off the news and made fresh record highs.

Interest rates: US 10yr treasury yields fell from 2.22% to 2.14% (lowest since 10 Nov) - mostly in response to the US payrolls data. 2yr yields fell from 1.29% to 1.26% but fully retraced a few hours later. Fed fund futures yields continued to price a 14 June rate hike as a 95% chance (approximately).

Currencies: The US dollar index closed Friday 0.5% lower, falling to the lowest level since 9 June. EUR jumped from 1.1210 to 1.1285 – a seven-month high. USD/USD fell from 111.60 to 110.35. AUD rose from 0.7375 to 0.7447. Outperformer NZD rose from 0.7080 to 0.7147 – a three-month high. AUD/NZD fell from 1.0440 to 1.0391 – a four-month low.

The weekly CFTC speculative positioning update reported USD index longs had decreased, EUR longs had increased, modest AUD longs remained so, and NZD shorts had decreased.

Economic Wrap

US non-farm payrolls rose by 138k in May (vs 182k expected), a weak reading accentuated by an outsized -66k revision to the previous two months. The three-month average pace of jobs growth now sits at a meagre +121k, down from +200k as recently as February, and the weakest pace since August 2012.

The slowing in jobs was broad-based. Manufacturing shed 1k (vs a 3mth average of +15k), trade/transport and retail each shed 6k, and leisure/hospitality gained only +31k (vs 58k last month).

Average hourly earnings grew 0.2% in the month, in line with expectations, but with April was revised -0.1ppts to +0.2%, taking the annual pace to a non-threatening 2.5% (2.6% expected).

The labour force shed 429k (participation rate -0.2ppts to 62.7%) sending the unemployment rate down to a new cycle low of 4.3%, though many will expect the participation rate and the unemployment rate to both reverse higher next month.

The broader U6 measure of unemployment fell to a new cycle low of 8.4%, but mainly due to participation, while most other parts of the survey underwhelmed: the household survey showed an outright loss of jobs (-233k), and the employment to population ratio slipped 0.2ppts to 60.0.

This weaker update will not derail a 14 June Fed hike but it will certainly give those like Brainard who have started to fret about recent low inflation readings some added ammunition.

Following the US jobs data, the Atlanta Fed revised its model prediction of Q2 GDP from 4.0% to 3.4%.

FOMC hawk Harker saw two more rates hike in 2017 as appropriate, thought the economy was “normal” now, and saw the outlook as “pretty good”. He thought the jobs report was good and warned there was little slack in the labour market."