Mixed messages from May’s job report are causing analysts to scratch their heads as to the direction of the US Federal Reserve will take with interest rates at their upcoming FOMC meeting later this month.
Friday's non-farm payrolls report surpassed expectations by a significant margin, following an already impressive ADP private payrolls report earlier in the week. Instead of the widely-predicted addition of 190,000 jobs, the May report revealed a remarkable 339,000 job creation, nearly double the anticipated figure.
Moreover, the April numbers were revised upward to 294,000, further highlighting the strength of employment growth.
However, the unemployment rate took an unexpected turn, rising to 3.7% instead of the forecasted 3.5%.
The data tells us that companies are reporting a jobs surge, yet households are telling us employment plunged. That leaves Jerome Powell and the Federal Reserve with a much less clear picture of the economy than they were hoping for prior to May's readout.
It’s widely expected that the Fed will hold off on making a decision at the June meeting and instead hike rates again in July.
“With wage growth continuing to soften and hours worked edging lower the market is thinking the June FOMC meeting ‘skip’ narrative still holds,” ING’s chief international economist James Knightley noted in reaction to Friday’s data.
But a “hot” core CPI print on June 13 could yet tip the balance, according to Knightley, echoing the wider view from the Street, and market rate hike expectations have edged a little higher on the back of the mixed data.
“Remember, too, that labour data is the most lagging of all the data releases and is the worst guide for where the economy is actually heading,” Knightley added.
“Our house view is that we are at the peak for the Fed funds target range, but we have to remember that we get CPI the day ahead of the June 14 FOMC meeting and a 0.4% (month-over-month) print for the core rate (as the consensus is currently expecting) or 0.5% could yet swing the market back in favor of a hike.”
The next FOMC reading is scheduled for June 14.
Contact Angela at angela@proactiveinvestors.com
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