April NFP Misses Big, June Fed Rate Hike Busted

Yellen, we have a problem. April's jobs data was a disaster (as we had forewarned) and markets are starting to get properly concerned this time, judging by the way in which they reacted. A June rate hike by the Fed now seems less likely than ever before, with the Fed Funds futures market implying a mere 4% chance of a hike next month when the FOMC reconvenes to decide on the future of the U.S. economy.

The start of May is really turning out to be a summer of shocks, which is why even Bill Gross could possibility foresee the advent of QE being launched by the Fed — Helicopter money. Should things not improve quickly, the Fed might be at risk of loosing what's little left of its credibility and be busted by the markets as we have had a glimpse of this week.

  "The much awaited April U.S. NFP report disappointed big time. The headline jobs added figure fell from March to 160,000 against expectations of 200,000. This is the biggest miss in at least 4 months, and is the lowest print since September 2015 when only 145,000 jobs were added.    The U3 unemployment rate was unchanged from March at 5%, inline with expectations. Average hourly earnings (wage inflation) creep up from March's +0.2% to +0.3%, matching expectations.    So besides the headline print, all other aspects of April's report were generally on point. However, what surprised us most was the reaction by the markets.    Completely bonkers it seems as the U.S. dollar first dumped on the release and then rallied even harder a few minutes later to carve in fresh weekly highs. It doesn't make sense because stocks are falling pretty hard, gold jumped more than $15 on the news (implying USD selling), and bonds yields are lower. So what exactly is the USD doing rallying on what is undeniably a terrible jobs report?"     Business Of Finance on Facebook, 6 May 2016

"The much awaited April U.S. NFP report disappointed big time. The headline jobs added figure fell from March to 160,000 against expectations of 200,000. This is the biggest miss in at least 4 months, and is the lowest print since September 2015 when only 145,000 jobs were added.

The U3 unemployment rate was unchanged from March at 5%, inline with expectations. Average hourly earnings (wage inflation) creep up from March's +0.2% to +0.3%, matching expectations.

So besides the headline print, all other aspects of April's report were generally on point. However, what surprised us most was the reaction by the markets.

Completely bonkers it seems as the U.S. dollar first dumped on the release and then rallied even harder a few minutes later to carve in fresh weekly highs. It doesn't make sense because stocks are falling pretty hard, gold jumped more than $15 on the news (implying USD selling), and bonds yields are lower. So what exactly is the USD doing rallying on what is undeniably a terrible jobs report?" 

Business Of Finance on Facebook, 6 May 2016

The April NFP report released Friday missed the headline expectation by 40,000 jobs coming in at 160,000, or the lowest since September 2015 when the U.S. saw only 145,000 jobs added. September 2015 was also when the uptrend in the U.S. dollar really started to buckle under the stress of a trapped Fed. Are we due for another redux this time?

Key points

According to the BLS, April saw a total of 160,000 non-farm jobs added to the economy, against expectations of 200,000. This is largely down from March's 208,000 (revised lower from 215,000), and February's 233,000 (revised lower from 242,000).

  • 160,000 non-farm jobs added in April vs. 200,000 expected
  • U3 unemployment rate unchanged from March at 5% vs. 5% expected
  • March's 215,000 figure was revised lower to 208,000, and February's 242,000 to 233,000; totaling net revision of -19,000
  • 253,000 full-time jobs lost, 21,000 part-time jobs lost per the Household Survey
  • 171,000 private jobs added in April vs. 195,000 expected, down from March's 184,000 (revised lower from 230,000)
  • Average hourly earnings rose +0.3% MoM vs. +0.3% expected, up from a downward revised +0.2% in March
  • Average weekly hours at 34.5 vs. 34.5 expected, up from March's 34.4

From the BLS's NFP Report:

Total nonfarm payroll employment increased by 160,000 in April. Over the prior12 months, employment growth had averaged 232,000 per month. In April, employment gains occurred in professional and business services, health care,  and financial activities, while mining continued to lose jobs.
Professional and business services added 65,000 jobs in April. The industry added an average of 51,000 jobs per month over the prior 12 months. In April,  job gains occurred in management and technical consulting services (+21,000)  and in computer systems design and related services (+7,000).
In April, health care employment rose by 44,000, with most of the increaseoccurring in hospitals (+23,000) and ambulatory health care services (+19,000). Over the year, health care employment has increased by 502,000.
Employment in financial activities rose by 20,000 in April, with credit intermediation and related activities (+8,000) contributing to the gain. Financial activities has added 160,000 jobs over the past 12 months.
Mining employment continued to decline in April (-7,000). Since reaching a peak in September 2014, employment in mining has decreased by 191,000, with more than three-quarters of the loss in support activities for mining.
Employment in other major industries, including construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, leisure and hospitality, and government, showed little or no change over the month.
The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.5 hours in April. The manufacturing workweek and overtime remained unchanged at 40.7 hours and 3.3 hours, respectively. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was up by 0.1 hour to 33.7 hours.
In April, average hourly earnings for all employees on private nonfarm payrolls increased by 8 cents to $25.53, following an increase of 6 cents in March. Over the year, average hourly earnings have risen by 2.5 percent. In April, average hourly earnings of private-sector production and nonsupervisory employees increased by 5 cents to $21.45.
The change in total nonfarm payroll employment for February was revised from +245,000 to +233,000, and the change for March was revised from +215,000 to +208,000. With these revisions, employment gains in February and March combined were 19,000 less than previously reported. Over the past 3 months, job gains have averaged 200,000 per month.

Our take

This was a bad report, no questioning that. The jobs added figure was terrible and confirms this week's ADP miss and deep rollover on Wednesday. April's NFP print also confirms softness in the ISM and PMI manufacturing surveys, especially looking at their manufacturing employment statistics where jobs continue to be lost instead of created on net.

  "Some more color on the U.S. jobs market in light of April's terrible NFP print. As we highlighted on Wednesday, the ADP employment report missed expectations by almost the same magnitude as Friday's main report. We asked if both the ADP rollover (and miss) plus Thursday's 5-month high in the weekly initial jobless claims were harbingers for a disastrous April NFP. It turned out that they were indeed evil omens.    It is obvious that the labor market has started to roll over since the Fed lifted off from the zero bound in December 2015, raising rates for the first time in almost a decade, sending shock waves throughout the financial markets and perhaps even the real economy. Ever since, layoffs have started to increase, corporate profitability has declined significantly enough to put the S&P 500 as a whole in an official earnings recession, and consumer/small business sentiment/confidence into a downturn.    Without sustained and higher than average growth in the labor force (labor force has already been stagnant for a long period), worker productivity remains the only hope for output growth. That isn't happening as seen in the middle pane. In fact, productivity in the U.S. is now shrinking YoY albeit marginally. So no luck here.    The only silver lining (and that itself is of a rather unpolished shine) remains wage inflation, something the Fed heavily regards when making a policy decision on interest rates and guidance/language. Having risen relatively steadily since 1Q15, average hourly earnings for April (the key measure for wage growth) came in at +2.3% YoY, flat from March. However we note that growth is off from the +2.6% highs seen in October 2015 and January 2016, respectively. This is the only reason we can think of for the strength in the U.S. dollar despite a very bad headline jobs added print."    Business Of Finance on Facebook, 7 May 2016

"Some more color on the U.S. jobs market in light of April's terrible NFP print. As we highlighted on Wednesday, the ADP employment report missed expectations by almost the same magnitude as Friday's main report. We asked if both the ADP rollover (and miss) plus Thursday's 5-month high in the weekly initial jobless claims were harbingers for a disastrous April NFP. It turned out that they were indeed evil omens.

It is obvious that the labor market has started to roll over since the Fed lifted off from the zero bound in December 2015, raising rates for the first time in almost a decade, sending shock waves throughout the financial markets and perhaps even the real economy. Ever since, layoffs have started to increase, corporate profitability has declined significantly enough to put the S&P 500 as a whole in an official earnings recession, and consumer/small business sentiment/confidence into a downturn.

Without sustained and higher than average growth in the labor force (labor force has already been stagnant for a long period), worker productivity remains the only hope for output growth. That isn't happening as seen in the middle pane. In fact, productivity in the U.S. is now shrinking YoY albeit marginally. So no luck here.

The only silver lining (and that itself is of a rather unpolished shine) remains wage inflation, something the Fed heavily regards when making a policy decision on interest rates and guidance/language. Having risen relatively steadily since 1Q15, average hourly earnings for April (the key measure for wage growth) came in at +2.3% YoY, flat from March. However we note that growth is off from the +2.6% highs seen in October 2015 and January 2016, respectively. This is the only reason we can think of for the strength in the U.S. dollar despite a very bad headline jobs added print."

Business Of Finance on Facebook, 7 May 2016

On top of these, Thursday's initial jobless claims rose to 3-month highs indicating that more workers were laid off last week. All in all, U.S. macro has been deteriorating since the start of 2016. Pace of deterioration started to pick up in late March and was enough to sway the Fed from hiking last month.

For us, it is a tad too early to form solid conclusions yet. Like last September's NFP stunner of a very low print, April's figure may end up being revised much higher in the coming months for whatever reason the BLS deems fit. So it's a wait and see situation for us now. 

Market reactions & implications

Like us, the markets' reactions to Friday's dissapointment was apparently hay wired. Forgiving them of their initial violent knee jerks, almost every major asset class ended the day higher: Stocks were up after erasing earlier losses, the dollar ended higher after smashing lower and basing around in choppy trading, gold ended the week near its highs, bonds soared, and even HY credit ended higher. 

In the charts above you can see the initial reaction in the minutes following the NFP release. Markets blared a risk off note with stocks and risk being sold, while bonds and gold were bought for safety and quality was sought.

  "The market only implies about a 4% chance of a June rate hike by the Fed after today's terrible NFP report. July sees a 17% chance, and September 27%. Notice how June rate hike odds have constantly decline as we near the month? That's how bad the American economy is for a hawkish Fed to hike into.    Which is paradoxical because the greenback is significantly higher after the dismal jobs data as seen by the drop in the yen (USDJPY surging), even though gold and silver (precious metals), and bond prices have rallied hard (all implying selling of USD)."    Business Of Finance on Facebook, 6 May 2016

"The market only implies about a 4% chance of a June rate hike by the Fed after today's terrible NFP report. July sees a 17% chance, and September 27%. Notice how June rate hike odds have constantly decline as we near the month? That's how bad the American economy is for a hawkish Fed to hike into.

Which is paradoxical because the greenback is significantly higher after the dismal jobs data as seen by the drop in the yen (USDJPY surging), even though gold and silver (precious metals), and bond prices have rallied hard (all implying selling of USD)."

Business Of Finance on Facebook, 6 May 2016

Fed Funds futures immediately discounted for much lower June rate hike odds, shifting their emphasis through September and beyond. While we are still leaving the door open to the possibility of a June hike, there is no doubt that a bad April jobs report affects the Fed's decisions. 

After a few hours of trading post NFP, risk caught a bid with equities and high yield rallying out of their day's lows. Volatility was still present throughout but we were confused as to what was driving such flows. 

  "The aftermath of Friday's big 40,000 miss in April's NFP. Everything is up: U.S. dollar, stocks, bonds, gold, and idiocy...    So wait a minute, the initial knee jerk reaction was a weaker dollar, risk aversion, and flight to safety and quality. After a brief 20-30 minutes of that, it flipped to risk on (equities & HY), while safety and quality (treasuries & gold) were still very bid, while the dollar continued to rise before slipping into choppy trading for some time.    Few hours after the European close, the dollar resumed higher against DM and EM FX, while gold started to fade. After initially pumping, equities were dumped violently before catching a strong bid which brought it above their intraday highs.    Whatever is driving these nonsensical and illogical moves is beyond us. What we can sense is that the markets are very confused on what to make of April's NFP snafu. No more June hike?"    Business Of Finance on Facebook, 7 May 2016

"The aftermath of Friday's big 40,000 miss in April's NFP. Everything is up: U.S. dollar, stocks, bonds, gold, and idiocy...

So wait a minute, the initial knee jerk reaction was a weaker dollar, risk aversion, and flight to safety and quality. After a brief 20-30 minutes of that, it flipped to risk on (equities & HY), while safety and quality (treasuries & gold) were still very bid, while the dollar continued to rise before slipping into choppy trading for some time.

Few hours after the European close, the dollar resumed higher against DM and EM FX, while gold started to fade. After initially pumping, equities were dumped violently before catching a strong bid which brought it above their intraday highs.

Whatever is driving these nonsensical and illogical moves is beyond us. What we can sense is that the markets are very confused on what to make of April's NFP snafu. No more June hike?"

Business Of Finance on Facebook, 7 May 2016

For now, we are still sticking to our bearish dollar bias but do so with extra caution. This week's rebound in the greenback (something we warned about on Monday) was more impulsive that we ever expected (and for many others). Such volatility may hint at an intermediate reversal in trend despite bearish fundamentals. As we have harped on for a long time, in the short to medium term, fundamentals take a back seat while technicals and positioning are dominant drivers.

We are ready to flip to being bullish the dollar for the medium term contingent on how the market trades the following week. Do not however be mistaken, macro and fundamentals point to a weaker and not a stronger dollar.

Sellside bonus

Post analysis note from Goldman Sachs: 

Soft April Employment Report, Change in Fed Call
BOTTOM LINE:
  • Nonfarm payroll employment increased by 160k in April, less than expected by consensus forecasts.
  • Average hourly earnings gained 2.5% from a year earlier.
  • The unemployment rate was unchanged at 5.0%.
  • In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase at the June FOMC meeting. We now forecast the next rate hike will come in September. 
MAIN POINTS:
  1. Nonfarm payroll employment increased by 160k in April, less than expected by consensus forecasts. Employment growth for the prior two months was also revised down by a net 19k. The deceleration reflected a pullback in construction (+1k vs +41k previously), retail (-3k vs +39k) and government (-11k vs +24k). Payback from weather-related gains in payrolls in earlier months may have depressed employment growth last month, particularly in the construction sector. Other details in the establishment survey were slightly more encouraging.
  2. Average hourly earnings rose 0.3% in April (vs. +0.3% consensus) and were up 2.5% on a year-on-year basis, an increase from 2.3% in March. The year-over-year increase was boosted in part by upward revisions to February months. Average weekly hours rose to 34.5 after two months at 34.4 and aggregate weekly payrolls—the product of employment, average hourly earnings, and average weekly hours—rose 0.8% on the month.
  3. The household survey showed a 316k decline in employment in April, following a string of very strong gains in recent months. Despite the decline in employment, the unemployment rate remained at 5.0% (4.984% unrounded) due to a two-tenths decline in the labor force participation rate to 62.8%. The U6 underemployment rate fell 0.1pp to 9.7%, mostly due to a decline in involuntary part-time employment.
  4. With payrolls, unemployment claims, consumer sentiment, vehicle sales, and a number of business surveys in hand, our preliminary read for the April Current Activity Indicator is +2.0%, up from +1.9% in March.
  5. In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase at the June FOMC meeting. We now forecast the next rate hike will come in September.