Chance Of June Rate Hike Remains High Despite Lackluster Jobs Data

For the second-straight May, jobs growth disappointed. But this time, it’s not seen as likely to change minds about rate hikes over at Fed headquarters on Constitution Avenue in Washington, D.C.

Even after May jobs rose by just 138,000, compared with pre-report estimates for 185,000, Fed funds futures still showed a nearly 90% chance of a rate hike at the June 13-14 Fed meeting. What’s less clear is what happens with rates later in the year. Odds of a rate hike by the September meeting are less than 25%, but about 45% by year-end, futures prices indicate. 

It’s a contrast from 2016, when a weak May jobs report led in part to the Fed’s decision to put off a rate hike. The Fed has pointed toward a total of three hikes this year, but also wants to start unwinding its $4.5 trillion balance sheet. Now some analysts think the Fed might begin addressing its balance sheet this fall, perhaps instead of an autumn rate hike. We’ll see.

While the Fed might be a big focus this coming week as its meeting approaches, there’s a lot to ponder besides that, including more thoughts about the May jobs report and what it might say about the economy. First of all, one month isn’t a trend, though it’s fair to note that the Fed did lower job gains for March and April as well. Generally, job growth has been pretty steady, and it’s showing up in sectors that point toward economic strength, like construction, health care, and business-to-business services.

In addition, the U6 number, a broader perspective on unemployment, sank to 10-year lows at 8.4%. That could indicate more optimism about the job market as long-term unemployed people start finding positions.

The other factor to consider is wage growth, which ticked up just 0.2% in May, matching a revised 0.2% for April. Average hourly earnings are up 2.5% in the last 12 months, not a figure that would typically raise concerns about inflation. While inflation can be a good thing because it often indicates a growing economy, the relatively manageable inflation we’re seeing despite a tight labor market might mean the Fed has more room to keep rates at accommodative levels longer. Ultimately that could help keep the stock rally intact.

The stock market didn’t seem to find the jobs data particularly worrisome, bounding up to new record highs for all three major indices by midday Friday. The Dow Jones Transportation Average ($DJT), sometimes an indicator of economic vigor, rose sharply. So did the Russell 2000 (RUT) index of small stocks. These two are good indicators to keep watching for a read on the U.S. economy, as their focus tends to be more on the domestic side.

One interesting development after the jobs report was a rally in the bond market that took 10-year yields down below 2.16% by midday Friday, the lowest level of the year. Normally you’d expect to see yields rise in a rate-hike environment like the one now, but that hasn’t happened. Perhaps it’s a reflection of light inflation, or it could point to concerns about the pace of economic growth. The Atlanta Fed’s GDP Now indicator recently ticked down to 3.4% for Q2 from the previous 3.6% estimate, and some analysts project Q2 gross domestic product (GDP) to come in well below that.

The U.S. dollar also tumbled after the jobs data, possibly on concerns about economic growth. Volatility remained muted, with VIX below 10 as of midday Friday.

FIGURE 1: TRANSPORTS, SMALL STOCKS SURGE. The Dow Jones Transportation Average ($DJT), plotted through midday Friday on the thinkorswim platform from TD Ameritrade,  rose more than 1% after jobs data, while the Russell 2000 (RUT) index of small stocks (purple line) also posted big gains. Data source: FTSE Russell. For illustrative purposes only. Past performance does not guarantee future results.

Week Ahead — What To Watch

Unlike the previous week with its plethora of economic data, the coming week doesn’t have so many reports to monitor. Key economic data include April factory orders on Monday, the Job Openings and Labor Turnover Survey (JOLTS) report on Tuesday, and April wholesale inventories on Friday. But that’s about it if you don’t count regular weekly items like oil supplies and unemployment claims. The JOLTs report could be of particular interest after the May jobs data disappointed, as recent JOLTS reports have been generally positive. Also keep an eye on oil, which was trading below $48 a barrel by midday Friday, near recent lows. There was talk that President Trump’s decision to exit the Paris Climate Agreement might encourage more domestic drilling, perhaps weighing on prices down the road. If oil drops below $45, that might start to weigh on the markets beyond just the energy sector.

Apple Conference

Stay tuned as Apple Inc. AAPL hosts its World Wide Developers Conference starting Monday and running through Friday. The company typically holds a keynote on the first day of this event, and often releases new product lines or provides commentary on future product lines. AAPL shares recently hit all-time highs and remained near those levels as of midday Friday.

Inside the Beltway

Attention might turn back to Washington this coming Thursday as former FBI Director James Comey is scheduled to testify to Congress about various discussions he had with President Trump. The market seems to be getting a little less reactive to headlines from D.C. after the big flop stocks took one day late last month on political news, but Comey’s appearance is still worth monitoring. A lot of the recent gains in stocks came amid hopes of tax reform, but there’s widespread fear that continued political controversy could slow down that agenda. Comey’s open session in front of the Senate Intelligence Committee is scheduled to begin at 10 a.m. ET Thursday.