The jobs report for last month from the United States serves as a useful reminder that nothing can be taken for granted as we enter a month strewn with significant event risk.
Already in the first few days of June there has been an Opec meeting, a European Central Bank council meeting, and of course, the pivotal US employment report for last month, which badly disappointed relative to expectations.
This will set the stage for Janet Yellen’s next big speech later today and ultimately for the federal open market committee meeting on June 14-15. Following on from this there will be a Bank of Japan policy meeting on June 15-16, Ms Yellen’s Congressional testimony on June 21-22, the Brexit referendum on June 23, while Spanish elections will follow on June 26.
Grexit uncertainties have not gone away completely either, while closer to home markets will be anticipating burgeoning new debt issuance.
Few people expected an output deal at the latest Opec meeting, so there was little room for disappointment when no deal materialised. Likewise, reactions to the ECB meeting were similarly muted, as the ECB is now widely regarded to be in “wait-and-see” mode, probably until the second half of the year.
However, the weak US jobs data was a bolt out of the blue and has significantly altered assumptions for at least the rest of this month, and some would say the rest of the year.
The 38,000 increase last month in US non-farm payrolls, combined with downward revisions to previous months probably will make a June rate hike by the Fed very difficult to countenance now. It is only a few weeks since the FOMC started talking up the prospect of a June move, so this will be a difficult pill for many Fed officials to swallow.
Attention will now switch to next month’s FOMC meeting as the next realistic chance for a Fed tightening, but June’s jobs figures will have to improve a lot if this is to happen, with others holding out for a September tightening or for no hike this year at all.
However, there are a number of caveats to the weak US jobs data that should be highlighted, which suggest that not everything in the labour market is quite so gloomy. Excluding the effect of the Verizon strike, which caused 35,000 to temporarily leave the workforce, payrolls would have risen by 73,000, which while still weak is not a million miles from the 100,000 rate that is needed for job growth to keep downward pressure on the unemployment rate.
Indeed, the unemployment rate fell sharply last month to 4.7 per cent from 5.0 per cent in April. This is also helping to maintain upward pressure on average earnings, something the Fed has been seeking for some time. With other labour market indicators also pointing to solid trends in employment, the figure for last month might reasonably be viewed as an anomaly that will rebound down the road with probable revisions.
For now, however, markets will have to live with what they see, which is a significantly weaker US employment picture than expected. Perspective may take time to achieve, which is probably a lesson that might need to be applied to other issues as well, most notably the Brexit debate in the UK, the other significant risk event facing markets this month. Only a few weeks ago as well, assumptions about an easy victory for the Remain campaign were dominant, but like a Fed rate hike these have suddenly started to look more fragile in the past few days.
Brexit opinion polls have narrowed sharply during the past two weeks, to such an extent that allowing for the usual margin of error, the end result could be very close indeed.
Certainly there is a growing scepticism in the UK about the conjecture from the Remain campaign about the economic consequences of leaving the EU, something that appears to be intensifying as the television debates get under way. In the event of a Brexit decision, perspective about the outlook is also likely to be required and will eventually be achieved. But as with the latest US jobs data the shock value initially would still be quite immense.
Tim Fox is the chief economist and head of research at Emirates NBD.
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