US Jobs Report Induces Fed to Cut Rate

June 10, 2019

| Fullerton Markets

Bets on Fed to cut within the year increase, sell USD/JPY?

Fed funds futures show a quarter-point cut almost fully priced in for July, and almost three-quarters of a point by the end of 2019

May employment report will increase pressure on the Fed to provide accommodation. However, it was not weak enough to drive interest rate action at the June FOMC meeting, beyond more dovish messaging.

In light of mounting evidence of a faster deceleration of economic momentum over the medium term, we now estimate that the Fed will remain on hold for the foreseeable future. It is premature to forecast rate cuts, as low unemployment will fortify consumer spending, but if trade tensions continue to escalate, policy makers may be forced to act later this year. A rapidly changing trade climate is poised to come into direct conflict with the Fed’s patient posture.

Nonfarm payrolls increased 75k in May, below the consensus estimate of 175k, following a 224k gain in April. The previous two months were revised down by 75k on net. After revisions, the average pace of job gains in the last three months was 151k. Unemployment rate held steady at 3.6%, as the household survey showed an employment gain of 113k amid labour-force growth of 176k. If the labour market can sustain job growth near 100k per month, the unemployment rate should be able to avoid drifting higher.

At this point of the expansion, consumers, representing about 70% of the economy, are underpinning U.S. growth. The outlook for their spending gets shaky when you see that wage growth has cooled now for three straight months. This hasn't happened since 2009.

Fed funds futures show a quarter-point cut almost fully priced in for July, and almost three-quarters of a point by the end of 2019. The two-year Treasury yield fell as much as 10 basis points to 1.78%, close to the 2019 low reached Wednesday, while the 10-year rate dipped as much as 6 basis points to 2.05%. The dollar slid.

The jobs report was sufficiently weak to evoke a market response. About 30 minutes after the release, yields on 10-year Treasuries were down 6 bps to 2.06%, while yields on two-year Treasuries declined to 1.79% from 1.87% prior. The market probability of a Fed rate cut in September ticked up to 97% from 94% just ahead of the release. The dollar declined by 0.4%.

Our Picks

EUR/USD – Slightly bullish.

ECB’s unwillingness to cut rate may push this pair toward 1.1350 this week.

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