Last week, the U.S. jobs report for May took centre stage in terms of economic data. Nonfarm payrolls grew just 138,0001 – well below expectations and certainly not what was indicated by the ADP National Employment Report released earlier in the week,2 which showed payroll growth of 253,000 in May. Employment disappointment extended back to the previous two months. The April nonfarm payrolls number was revised down from 211,000 to 174,000, while the March jobs report was revised down from 79,000 to an even more anemic 50,000.1
However, this lackluster payroll growth should not be surprising given that the U.S. labour market recovery is maturing, which typically means smaller job gains each month. The good news is that headline unemployment is now down to a 16-year low of 4.3%.1 A broader measure of unemployment that includes people who are working part time but would prefer full-time jobs – the U6, or underemployment, rate – fell to 8.4%, its lowest level since November 2007.1 On the other hand, the labour force participation rate – a measure of people who are either working or looking for jobs – fell from 62.9% to 62.7%.1
Typically, a tightening labour market results in significant wage growth. But that hasn’t happened this time around. Average hourly growth rose just 0.2% for the month and 2.5% for the past year.1 It seems that certain industries and regions are experiencing higher wage growth than others, perhaps reflecting disruptions in some industries.
What does the jobs report mean for interest rates?
I had mentioned in last week’s review that a solid jobs report would potentially “seal the deal” on a Fed rate hike in June. While this report was disappointing relative to expectations, it was still solid – and we’ve actually seen an increase in the probability of a June rate hike, as calculated by the CME Group3 through fed funds futures, in the past week – from 87.7% a week ago to 95.8% as of this past Sunday evening. However, it seems the trend of lower job growth and relatively low wage growth in particular jeopardizes the expectation of three rate hikes this year. And that may be why we saw the yield on the 10-year Treasury fall on Friday after the jobs report was released.
U.K. voters head to the polls in the wake of London attack
Over the weekend, terrorism returned to the United Kingdom for the third time in recent months, and our hearts go out to the victims, their families and all the people of the U.K.
Terrorism carries with it some very heavy costs – economic, psychological and political – which can weigh heavily on a society. The U.K. will be going to the polls this Thursday in a general election to vote on members of Parliament, and Saturday’s London Bridge attack – along with the growing realization that these kinds of smaller-scale attacks from terrorists with “a domestic centre of gravity” are extremely difficult to prevent – could have an impact on voting. (For example, the Paris and Brussels bombings clearly had an impact on the U.K.’s Brexit vote in June 2016.)
When Prime Minister Theresa May called for elections several months ago, it was viewed as an opportunity for her to demonstrate support for her agenda, strengthening her hand in Brexit negotiations. However, polls in the past several weeks suggested her popularity was waning and her ability to maintain a majority in Parliament was in jeopardy. However, we may see Prime Minister May gain support between now and election day given that she is perceived to be “tougher” on terrorism.
While terrorism could have an impact at the polls, I do not expect a major reaction from the markets, especially as an improving global economy is providing some support for stocks. However, repeated terrorist attacks like the one seen this past weekend over a short time span could have a stifling effect on consumers and result in a short-term elevation in Treasury and gold buying, as well as stock volatility. (The yield on the 10-year Treasury fell dramatically after this weekend’s attack, while gold rose to a six-week high.)
Looking ahead to labour news and political investigations
As we look ahead, I will be reviewing closely the U.S. Labor Market Conditions Index (LMCI), which was released yesterday. The LMCI is a lesser-known gauge of the employment situation that some members of the Federal Open Market Committee follow, particularly Chair Janet Yellen, who has referenced it for several years now. The LMCI is a dynamic model created by the U.S. Federal Reserve (Fed) to help measure job-market conditions. The index is made up of 19 different factors, including indicators of unemployment, underemployment, work weeks, wages, vacancies, hirings and quits and consumer and business sentiment. This makes sense as a metric for the Fed to follow closely given that the 19 labour-market conditions provide a more holistic and nuanced picture of the labour market than just the unemployment rate.
This will also be an interesting week for geopolitical and monetary policy risk:
- Former FBI Director James Comey will testify later this week regarding President Donald Trump and the investigation into allegations that Russia attempted to influence the U.S. presidential election. There is always the potential for a bombshell with this kind of testimony, especially given that Mr. Comey requested a public hearing. In short, revelations could unnerve traders and investors.
- The European Central Bank also meets this week and, given the improving European economy, all ears will be listening for any murmurs of “taper talk.” We will want to pay close attention to the outcome of this meeting, especially given the off chance that taper talk can lead to a taper tantrum.
I’ll also be following the U.K. election on Thursday, as the results may dictate the kind of Brexit that the U.K. pursues – and how orderly it is.
Key takeaway for investors
In this environment, I believe that being extremely well-diversified with at least some exposure to lower volatility securities may make sense for long-term investors.