Today’s employment report for May came in hotter than expected, with 272,000 jobs added to the US economy versus consensus expectations calling for 180,000. The gains were broad based, with the health care, government, and leisure and hospitality industries posting the largest gains. The participation rate, however, declined to 62.5%, while the unemployment rate ticked up to 4.0% for the first time since January 2022. Although the labor market has shown signs of softening recently, the May headline reading possibly received a boost from the spring hiring season. Average hourly earnings increased 0.4% month-over-month and 4.1% year-over-year, surpassing the prior month and expectations calling for 3.9%. The Job Openings and Labor Turnover Survey (JOLTS) fell from 8.355 million to 8.059 million job openings in April, dipping to the lowest level in over three years.
Earlier this week, the Institute for Supply Management (ISM) Manufacturing Index cooled to 48.7 in May from 49.2 in April, remaining in contractionary territory. Slower demand for goods and tepid improvement in supply conditions weighed on manufacturing in the month. Meanwhile, the ISM Services Index rebounded back into expansion territory, coming in at 53.8 for May, a significant improvement from 49.4 in the previous month. Business activity in the service sector surged to 61.2, although there are notable concerns in the industry over higher labor and financing costs.
The Bank of Canada and the European Central Bank both initiated rate cuts of 0.25% this week as their inflation rates have moved closer to their 2% targets. The US Federal Open Market Committee (FOMC) is scheduled to meet next week but is expected to maintain short term interest rates at the current target range of 5.25% - 5.50% on June 12. The fed funds futures market has reduced the implied probability of a quarter-point rate cut at the FOMC’s September meeting to 55% and currently has about 1.5 rate cuts priced in for the latter half of 2024.
US Treasury yields were volatile as rates rallied during the week on mostly softer data but then rebounded on Friday on the heels of the May employment report. Currently, the 2-year US Treasury is 2 basis points lower at 4.87% and the 10-year US Treasury is about 8 basis points lower at 4.43% on the week. The market will pay close attention to next week’s Consumer Price Index (CPI) inflation report and the outcome of the Fed’s meeting and comments from Fed Chair Jay Powell on Wednesday.
Next Week:
New York Fed 1-Year Inflation Expectations, CPI, FOMC Meeting, Producer Price Index (PPI), University of Michigan Sentiment Index
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