The US jobs retort? – Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the massive undershoot of expectations in Friday’s US jobs report represents a crash.

Key Quotes

“The futures market’s odds of a June Fed rate hike (from 22% to just 4%) and for July too (from 55% to 27%); the USD index (from 95.5 to 94.1); and, most critically, maybe, just maybe, both the Fed’s credibility and its implied “raising rates will raise confidence” meme.

While the jobs report was only one month, and it is always a volatile series, it was ugly. The headline print of 38K vs. 160K expectations, the weakest since September 2010, was bad enough but there were also downward revisions of 59K to the previous two months and a worrying decline in temporary help: after recent revisions that last-hired/first-fired series in particular looks more like a slow-down signal than a blip.

In terms of the Fed’s credibility, the jury is still out for now. However, let’s recall that in December and early January the FOMC were hawkish and talking about four rate hikes in 2016. Within weeks a market wobble and the onset of weak Q1 GDP had shifted their tone back to dovish and their March projection to two hikes; and now, just a month after a slew of suddenly-hawkish “June is live” rhetoric we get this payrolls report that has seen the market start to price hikes out again: by December only a 59% chance is now seen of even one hike.

However, the Fed are already launching their US jobs retort. Mester (a voting member) has stated one “can’t read too much into the labour market report,” and that “weak US jobs data hasn’t fundamentally changed the outlook,” while there are “risks with waiting too long with rate increases.” Also, naturally, the “Fed is not behind the curve.” The major highlight today will be a speech from Yellen and then the usually-dovish Rosengren. It will be very interesting to see what Fed Funds futures, the Treasury curve, USD, and equity markets make of their speeches if they echo Mester’s.”