Expectations for interest rate cuts were dampened again. How many cuts can we expect this year?
After the data release, the futures of the three major U.S. stock indices plunged, and U.S. Treasury yields rose, with the 10-year Treasury yield climbing over 10 basis points.
Traders have reduced their bets on the Federal Reserve cutting rates in the last three meetings of this year. Earlier this week, they expected two rate cuts of 25 basis points each by the end of the year, but following the non-farm payroll report, this has been revised down to just one cut.
Meanwhile, traders have also reduced their bets on the European Central Bank cutting rates, now expecting a 29 basis points cut by the end of the year.
However, some analysts believe that the rising unemployment rate is stronger evidence of labor market weakness. If the unemployment rate continues to deteriorate, the likelihood of the Fed cutting rates in September will significantly increase.
Morgan Stanley maintains that the Fed will cut rates three times starting in September. “We believe the Fed will see rising unemployment as a sign of further economic slowdown.”
How much water is in the May non-farm payroll report?
The non-farm payroll increase significantly exceeded expectations, so why did the unemployment rate rise instead of fall? Despite corporate surveys showing a very hot job market, the more accurate household survey report showed that the U.S. labor force fell sharply by 408,000 in May.
This means that the gap between the continuously rising corporate survey and the stagnant household survey data has hit a historical high! The household survey’s employment numbers have now fallen back to last summer’s levels.
So the question arises, how much of the 272,000 new jobs are real?
Some have found that according to the U.S. Bureau of Labor Statistics, 231,000 of these jobs come from the “birth/death adjustment” model, which is an estimate based on the creation of new businesses. These jobs were not actually counted but were assumed to exist and directly included in the spreadsheet.
In other words, these 231,000 jobs were “created out of thin air” by the statistical model to adjust the total employment figure.
Renowned analyst Anna Wong also pointed out that the May non-farm report sent mixed signals about the labor market. Although job growth was strong, the unemployment rate rose to 4%. She believes that the unemployment rate data currently better reflects the true state of the job market, as the “birth/death adjustment” model has become outdated.
Wong believes that the actual pace of job growth is currently less than 100,000 per month. This means the official job data is likely significantly overestimated and may face downward revisions in the future.
As Wong mentioned, historical non-farm employment data have been consistently revised down: March’s job gains were revised down by 5,000, and April’s by 10,000. After revisions, the combined March and April job numbers were 15,000 less than previously reported.
Healthcare, government, leisure, and hospitality sectors drive job growth
The non-farm report shows that in May, several sectors in the U.S. job market exhibited strong growth. Healthcare, government, leisure, and hospitality were the main drivers of job growth, while professional and business services also saw significant gains, marking the largest increase since the beginning of the year. Specifically:
– The healthcare sector added 68,000 jobs.
– Government employment increased by 43,000 jobs.
– The leisure and hospitality sector continued to grow, adding 42,000 jobs.
– Professional, scientific, and technical services added 32,000 jobs, significantly higher than the monthly average of 19,000 over the past year, marking the largest increase since the beginning of the year.
– Social assistance employment increased by 15,000 jobs, mainly in personal and family services (11,000 jobs).
– Retail employment increased by 13,000 jobs, with building material and garden equipment and supplies dealers adding 12,000 jobs.
Employment in other major sectors, such as mining, quarrying, oil and gas extraction, construction, manufacturing, wholesale trade, transportation and warehousing, information, and financial activities, showed little change.
