The weakest monthly jobs report in nearly six years is now calling into question whether the Federal Reserve will indeed be able to raise interest rates “in the coming months,” as it has been signaling strongly for the past several weeks.
U.S. stocks ended last week narrowly mixed while bond prices soared, pushing down yields on longer-term Treasury securities by about 15 basis points. On Friday the Labor Department reported that nonfarm payrolls rose by just 38,000 in May, the lowest number since September 2010 and less than a quarter of what the Street had been expecting. To make matters worse, the figures for March and April were downwardly revised by 59,000 jobs, lowering the average for the past three months to 116,000, well below the monthly average of 219,000 new jobs over the past 12 months. While the official unemployment rate fell to 4.7% from 5.0%, that was purely the result of people leaving the work force, as the labor participation rate fell to 62.6%.
Friday’s dismal jobs report wasn’t the only disappointing economic news of the week. Also on Friday, the Institute for Supply Management’s non-manufacturing index for May dropped nearly three points to 52.9, the lowest level in more than two years and well below even the most pessimistic forecast. The new orders index dropped nearly six points while the employment index fell 3.3 points to 49.7, pushing it into contraction territory. The ISM’s manufacturing barometer fared better, climbing to 51.3 from 50.8 in April. A separate report showed similar strength in the manufacturing sector, with factory orders climbing 1.9% in April. But construction spending dropped 1.8% in April, the biggest decline in more than five years. The news in the consumer sector was better. Personal spending jumped 1% in April, the fastest pace since August 2009, while incomes rose 0.4%. Yet the Conference Board’s consumer confidence index dropped more than two points in May to 92.6, its lowest level in six months. May auto sales also disappointed, falling for only the second month this year.
European stocks were down sharply last week as the European Central Bank held interest rates steady, which disappointed investors. The Stoxx Europe 600 fell 2.4% after rising sharply the previous three weeks, so there may have been some profit-taking there as well. ECB President Mario Draghi continued to preach patience to allow the bank’s previous actions to work, although he also said it “will not hesitate to act” with stronger measures if it fails to ignite inflation in the euro zone. The ECB said it would start its corporate bond purchase program on Wednesday and its new series of targeted loans on June 22. The news was good for sovereign bonds, as the yield on the benchmark 10-year German bund was cut in half to end the week at 0.7%.
Asian stocks were mixed. Japan’s Nikkei 225 fell 1.1%, its first decline in four weeks, despite an announcement by Prime Minister Shinzo Abe that he will delay a sales tax increase until 2019. In China, the Shanghai composite rebounded 4.2%, ending a six-week decline, while Hong Kong stocks rose 1.8%, their third weekly increase in a row.
Reports/dates/facts/links worth paying attention to over the next week:
1. June 6: Federal Reserve Chair Janet Yellen is scheduled to make two speeches in Philadelphia.
2. June 9: Weekly unemployment claims.
3. June 10: University of Michigan consumer sentiment index for June, first reading; U.S. Treasury budget report for May.