The US May jobs reported was stronger than expected. Although it will not boost the chances of a Fed rate hike later this month, a September lift-off still seems like the most likely scenario.
The US economy created 280k jobs in May after a revised 221k increase in April. The April figure is 2k lower than the initial estimate, but the March job growth was revised up by 30k to 119k. March is still an outlier. Average hourly earnings rose 0.3%, a little more than expected and sufficient to lift the year-over-year rate to 2.3%, which matches the high from August 2013. That matches the high from August 2009.
If there was anything disappointing in the report it was the tick up in the unemployment rate to 5.5% from 5.4%. This matches the 0.1% increase in the participation rate to 62.9%.
The report should quash talk in some quarters that the US was going to slip back into recession after the contraction in Q1. Indeed, to the contrary, the employment data will solidify expectations that the economy is rebounding in Q2. Estimates for Q2 growth may ratchet higher now. Next week's retail sales report should show that the increased income is encouraging Americans to go shopping again after pulling back in Q1.
Canada also reported better than expected employment data. Canada created almost 59k jobs. Of these, nearly 31k were full time jobs. The consensus had called for a 10k decline after the 47k increase in April. Canada's participation rate edged up to 65.9%. The unemployment rate was steady at 6.8%. This helping the Canadian dollar withstand the large rally in the US dollar.
US Treasuries have, as one would expected, sold off hard in response to the economic news. The 10-year yield is at 2.40%, new highs. The 2-year yield is up 7 bp at 73 bp. The December Fed funds contract now implies a yield of 37.5 bp, which would be the mid-point of a 25-50 bp target range, which would fully price in one hike by the Fed this year. The effective Fed funds rate has been steady in the middle of the current 0-25 bp range.
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