Jobs get choppy and rates plunge further
EDITOR'S NOTE
We are living through truly wacky times.
The much-awaited "official" U.S. jobs report this morning showed only 75,000 jobs were added last month, roughly half of what was expected.
The slowdown immediately sent bond yields even lower. The yield on the 10-year Treasury note was at 2.05%!!! Recall we were at 3.25% last fall!
The only way today's market reaction makes sense is if the report is truly emblematic of an economic slowdown. That, understandably, is the top concern right now. But it doesn't fully add up.
If this payrolls report captures a slowing labor market, then why haven't jobless claims, which are reported weekly and a much timelier read, shown the same thing?
The bears have been saying that employment overall is a lagging indicator, so jobless claims don't capture turns in the economy. I don't fully buy that, but also, if that's true, then why are markets ignoring the firmness in more recent jobless claims reports but believing the slowdown in payrolls last month? (That survey was done in the week of May 12th.)
Either the labor market is telling us something about the economy, or it's not. It seems odd that only one of the two reports--and the more lagging one--is seen as relevant. You could argue that the monthly jobs report captures hiring, while jobless claims capture firing, and that's the difference--but that's really splitting hairs.
Let's also keep in mind that the same jobs report this morning actually contains two surveys: the payroll survey of businesses, from which we get the "jobs added" number, and a household survey to determine the unemployment rate.
The May household survey was pretty strong. The U.S. unemployment rate held steady at 3.6%, a fifty-year low. Even the broadest ("U-6") gauge of unemployment has dropped to 7.1%. Average hourly earnings, meanwhile, rose 3.1% on the year and are actually rising faster (3.4%) for non-supervisory workers, i.e. lower earners.
Yet the markets reacted to all this by pricing in a higher chance of rate cuts this year, sending the Dow up as much as 350 points.
There is some evidence that tariffs have hit the economy--there's been an uptick in auto sector layoffs, per Challenger, but that was happening prior to the bulk of them taking effect. The ISM manufacturing survey fell to a 2.5-year low in May, but the services index--including the leading "new orders" index--actually rose.
The GDP forecasts have come down, but forecasters don't have a very good track record. In fairness, this is the first year since 2016 we've had two monthly "clunkers" (as Mike Feroli of JPM puts it) of less than 100k jobs added. It's worth noting, but then again, we had those clunkers in 2016 and ultimately shook it off to keep growing.
The real question is how much tariffs (and other factors, like weak global growth) will slow the economy, and the truthful answer is we don't know yet. It makes little sense to me that the Fed would cut rates before we do know, and finding out typically takes several months.
The more honest reason for rate cuts would be that inflation isn't accelerating despite the strong economy, and to me that messaging and discussion would make a lot more sense. But it gets wonky, and it's not really backed by mainstream academics, so the Fed doesn't seem to like having it.
I've gone on too long now, so I'll leave it there. Have a great weekend, and I'll see you Wednesday! (But first, I'll see you at 1 p.m.)
Kelly
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