Economists were expecting to see 1 million new jobs last month, so the government report of just 266,000 was a punch at the idea that the economy is rebounding on a gentle upward trajectory. The anticipation of a large number of jobs had also highlighted the Fed’s easing programs.
Stock futures rose and Treasury yields immediately fell after the report. But the 10-year Treasury yield, after falling to around 1.49%, turned to trade at 1.55%. The 5-year also fell but remained close to its low. Yields move opposite to bond prices. In afternoon trading, stocks remained higher with the Dow Jones rising about 160 points.
“I wonder if bonds are selling a bit because they only strengthen [Fed Chair Jerome] Powell wants to be patient, “said John Briggs, head of global strategy at NatWest Markets.” But if you’re like me, until the Fed goes down, I think the Fed is going to start talking about it in September. This means the market will be talking about it this summer. “
Economists said the May jobs report will provide more information on the state of hiring, which could have been slowed by bottlenecks appearing in supply chains. For example, auto workers have been inactive due to the shortage of semiconductors needed to build automobiles. There is also a severe labor shortage in some regions and industries. Economists also see closed schools as a problem, preventing parents from working. To some extent, increasing unemployment benefits can also be a factor.
“If you think of the obvious labor shortages to be inflationary, that should push up the 5-year yield,” said Michael Schumacher, rate manager at Wells Fargo. “But the other side is if you consider the odds of the Fed declining, it was pushed back slightly. Not much in my opinion, but people might agree. “
Schumacher said he still expects the Fed to discuss reducing its purchases of around $ 120 billion per month in treasury bills and mortgages.
Fed Chairman Jerome Powell dismissed the idea that the Fed would start discussing an outcome anytime soon. But some strategists still expect the Fed to be forced to slow down buying and ultimately end it due to the strength of the economic recovery and the specter of inflation.
A step towards the end of the bond buying program would ultimately be a step towards raising interest rates, which the Fed should not be doing any time soon. Powell said the Fed would end its slow buying of bonds before raising interest rates.
“If you’re an economy bull, you say it’s probably an aberration. … Bears can tell you are losing momentum. Both are possible until you have another month, ”Briggs said, noting that the next report could show a large amount of rentals. “When was the last time you reopened an economy during a pandemic? What are your seasonal factors for this? ”
He said the bond market was also reacting to the potential for more fiscal stimulus, highlighted by the White House after the low number.
“It’s that simple – cut rates, buy tech,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “The stock market can’t decide if they want to celebrate lower yields and maybe a Fed that won’t go down so fast but at the same time we are at the start of the recovery but we are seeing a lot of late stage behavior. like the demand for supply which heats up… this overheating. “
Jan Hatzius, chief economist at Goldman Sachs, said the bond market reversal appears to have come as traders looked at the inconsistencies and decided the number was skewed. “That was my opinion too,” he told CNBC. Hatzius said the weakness in the jobs report does not change his view that the Fed will cut its bond purchases from next year and then raise interest rates in 2024.
“I’m not sure that a failed report changes the math too much,” Schumacher said. “I suspect that the forecast range will be astronomical next month. “
The unemployment rate fell from 6% to 6.1% in April. The bulk of the hires were in the leisure and hospitality sector, which added 331,000 jobs due to the easing of restrictions linked to the pandemic in restaurants.
Average hourly wages rose 21 cents to $ 30.17 in April, and economists note that heavy hiring of workers in the hospitality industry generally drives overall wages down.
“It’s a devastating disappointment, more than just seasonal issues. We’ve had declines in everything from professional services to manufacturing and even couriers and transportation, ”said Diane Swonk, chief economist at Grant Thornton. “Turning the lights on in the economy is more difficult than turning them off. “
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