Strong Hiring Dampens Fed Rate-Cut Hopes

The May jobs report showed that hiring easily topped expectations, as employers added 272,000 payroll positions, even as the unemployment rate hit 4% for the first time in more than two years. After the jobs report, the S&P 500 fell moderately, then cut its losses as Wall Street weighed the implications for Fed rate cuts.

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Jobs Report Hits And Misses

The 272,000 overall employment gain exceeded Wall Street’s 182,000 forecast, according to Econoday. Private-sector employers added 229,000 jobs, beating 168,000 forecasts. Government jobs rose by 43,000.

Hiring gains in March and April were revised down by a combined 15,000 jobs.

Average hourly earnings rose 0.4% in May vs. 0.3% estimates. Twelve-month wage growth of 4.1% topped 3.9% forecasts.

Household Survey

The headline job and wage figures come from the Labor Department’s monthly survey of employers. The separate household survey details labor force participation, work status and the unemployment rate.

The household survey comes with a higher margin of error than the employer responses, so monthly changes should be taken with a grain of salt. However, the household survey has been known to lead the employer survey at economic turning points, so it shouldn’t be ignored.

The unemployment rate rose to 4%, defying predictions of a steady 3.9% rate.

That came as the ranks of the employed tumbled by 408,000. Meanwhile, the ranks of the unemployed increased by 157,000.

Which Jobs Report Should We Believe?

Wall Street’s initial reaction to the jobs report seemed to be one of confusion as the strong establishment survey data clashed with a notably weak household survey. The Fed is likely to pay more heed to the evidence of strength as it updates rate cut projections next week. Still, recent surveys from the Institute for Supply Management, S&P Global and National Federation of Independent Business suggest there may be something to the weak household data.

On the other hand, employment and payroll taxes withheld from worker paychecks have climbed a strong 7.4% over the seven weeks to Memorial Day vs. a year ago, according to an IBD analysis of daily Treasury statements. That suggests the jobs report’s strong employer data isn’t just a quirk.

More Jobs Report Details

Health care and social assistance employment rose by 83,500.Economists consider that growth to be more secular than cyclical in nature.

Retailers added 12,600 jobs, while transportation and warehousing jobs rose by 10,600. 

The construction industry added 21,000 jobs and manufacturers 8,000.

Temporary help jobs fell by 14,100, but that was a rare weak spot. The diffusion index that shows the breadth of hiring jumped to 63.4 from 56.6. Readings over 50 indicates more industries are adding jobs than shedding workers.

Fed Rate Cut Odds

After the May jobs report, markets are pricing in 55% odds of a rate cut by the Sept. 18 Fed meeting, down from 67% ahead of the jobs data, according to CME Group’s FedWatch page. Markets now see 51% odds of at least two quarter-point Fed rate cuts this year, down from 66%.

S&P 500

The S&P 500 slipped 0.1% after the jobs report in early Friday stock market action, battling back from a loss of around 0.6% before the open.

On Thursday, the S&P 500 inched down less than 0.1% after closing at a new record high on Wednesday.

Treasury yields, which have tumbled on weak data, soared on the jobs report. The 10-year Treasury yield jumped 15 basis points to 4.43%, but remained well below the recent May 29 peak of 4.62%.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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