03 June, AtoZForex, London – A notable trend slowing in job growth and an immediate impact on USD. May US employment was published sharply below expectations, rising only 38k on the month, despite market consensus of 160k and Barclays’ forecast of 150k. The low NFP reading not only wipes June hike of the table, but also posses risks to September Fed rate hike.
“One factor we expected to weigh on payrolls was the Verizon strike, which indeed was the case as information sector payrolls fell by 34k,” Barclays noted. The BLS have calculated that the Verizon strike effect at 35k and the employment data clearly reflect this estimate. Barclays looked at temporary payrolls to help provide an offset to the Verizon strike effect since temporary hires are sometimes used to mitigate the production related effects of striking workers. However, this time such action was not the case, temporary hires fell by 21k in May.
Delays to Fed rate hikes
Barclays has taken the view that labor markets send the most reliable signal about economic expansions and recessions. Payroll growth slowing continuously below its expansion average indicates higher risk of an economic recession, according to historical data that is. Since 1960, when US non-farm payroll growth has dipped persistently below its recovery period average, the US economy has often itself in an NBER defined recession 9 to 18 months in the future. Hence, Barclays warns that, since payroll growth has fallen below the current expansion average in three of the past four months, risk of a near to medium term US recession have risen.
June rate hike off the table
In terms of what the May US employment and payroll reports imply for Barclays outlook for monetary policy,
“we see this report as taking a June rate hike off the table and likely does the same for July since, in our view, FOMC members will likely want to see at least two months of evidence that hiring has rebounded before moving to another rate hike,” Barclays noted.
Risk to September Fed rate hike
Finally, the May employment data also pose risks to Barclays baseline forecast for a September interest rate hike and increases the probability that any subsequent move by the Fed to raise rates may not happen until December.
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