Largest NFP Miss Ever Kills June Fed Hike

When we first saw the 38,000 print, we thought it was an error with our news feed. But no, the U.S. economy added only 38,000 non-farm jobs in May, the lowest since September 2010, and the biggest miss on record. It's really hard to overstate how morbidly bad May's payrolls were. It is, however, commensurately easy to kiss a June rate hike by the Fed a sweet goodbye.

Everyone was shocked. We were definitely shell shocked, because we couldn't believe just how bad the numbers were. Neither could the markets.

Flash crashes and surges sprouted the instant the first HFT algos recognized that it was really an epic disaster. Yes, here we are 5 days late to reporting on this monumental event; but you see, we have more to bring to the table, now that 3 trading days have already passed for the dust to settle.

  "BIGGEST NFP MISS IN HISTORY! No one expected this even in their wildest most evil dreams! May NFP printed a mere +38,000 vs. expectations of +164,000, and down from April's already miserable +123,000 (revised lower from +160,000)!    Everything else missed or was inline at best. Only the U3 unemployment rate beat by falling to 4.7% vs. expectations of 4.9% and down from April's 5%, but this was due to massive shrinkage in the labor force (participation rate fell once again).    The USD is down sharply against all currencies, and precious metals (gold, silver, ect...) are surging. More updates to come.    Post the epic disaster that was the May NFP report, the greenback is down sharply, and is almost technically back in its bear market. All details included in our charts.    One thing is almost certain: No one in their right mind will be expecting the Fed to hike in June. Rate hike odds crash to nearly 0% again...    Who's having fun on this see-saw?"    Business Of Finance on Facebook, 3 June 2016

"BIGGEST NFP MISS IN HISTORY! No one expected this even in their wildest most evil dreams! May NFP printed a mere +38,000 vs. expectations of +164,000, and down from April's already miserable +123,000 (revised lower from +160,000)!

Everything else missed or was inline at best. Only the U3 unemployment rate beat by falling to 4.7% vs. expectations of 4.9% and down from April's 5%, but this was due to massive shrinkage in the labor force (participation rate fell once again).

The USD is down sharply against all currencies, and precious metals (gold, silver, ect...) are surging. More updates to come.

Post the epic disaster that was the May NFP report, the greenback is down sharply, and is almost technically back in its bear market. All details included in our charts.

One thing is almost certain: No one in their right mind will be expecting the Fed to hike in June. Rate hike odds crash to nearly 0% again...

Who's having fun on this see-saw?"

Business Of Finance on Facebook, 3 June 2016

Before we even go into the details of what is a very shocking development to the entire Fed tightening game, we want readers to put this entire edifice in proper context. To appreciate just how wildly the Fed has swayed the market's rate hike expectations, try to follow this series of chronological events:

  1. First it was the April FOMC statement that left the door open for a June hike;
  2. Then the markets braced for the April NFP report which was released in early May;
  3. April's payrolls missed big, busting June rate hike expectations;
  4. But the April FOMC meeting minutes, which were released later in May, seemed to indicate willingness to hike in June, once again raising expectations for a June hike.

Not as if we didn't warn readers about an impending volatile storm come May and onwards; see here, here, here, here, and here.

If you're still not tired of all this ping pong action, we shall overtly state that we are. While we cannot speak for the rest of the markets, the folks we talk to indeed share the same sentiments — enough with this nonsense, the market will go wherever it wants to go, and the Fed will do whatever it wants to do. Hike or no hike; in June, July, September, or when the cows come home.

Now that we've gotten that out of the way, let's dive down and get up close and personal with the details.

Key points

According to the BLS, May saw a total of 38,000 non-farm jobs added to the economy, against expectations of 164,000. This is largely down from April's 124,000 (revised lower from 160,000), and March's 186,000 (revised lower from 208,000).

  • 38,000 non-farm jobs added in May vs. 164,000 expected
  • U3 unemployment rate down from April's 5% at 4.7% vs. 4.9% expected
  • April's 160,000 figure was revised sharply lower to 124,000, and March's 208,000 figure was revised lower to 186,000; totaling net revision of -59,000
  • 25,000 private jobs added in May vs. 152,000 expected, down from April's 130,000 (revised sharply lower from 171,000)
  • Average hourly earnings rose +0.2% MoM vs. +0.2% expected, down from +0.3% in April
  • Average weekly hours at 34.4 vs. 34.5 expected, down from April's 34.5
  "Here's the full story of the just released May NFP report by the BLS that saw the weakest jobs gains in more than 5 years and the biggest miss on consensus expectations ever! Markets are thoroughly reeling from this massive negative shock.    In May, a paltry 38,000 jobs were added, which was a plunge from April's downward revised 123,000 (previously 160,000).    The change in total nonfarm payroll employment for March was revised from 208,000 to 186,000, while the change for April was revised from 160,000 to 123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged only 116,000 per month, much lower than a year ago.    The household survey was equally bad, with only 26,000 jobs added in May, bringing the total to 151,030. This happened as the number of unemployed persons tumbled from 7,920,000 to 7,436,000, driven by a massive surge in people not in the labor force which soared to a record 94.7 million, a monthly increase of over 600,000 workers!    This caused the U3 unemployment rate to fall from 5% in April to 4.7% in May (4.9% expected) and is the lowest since 2007. Again, this was not because of jobs added but because the labor force shrank in size as a record number of Americans are now outside the labor force — A massive exodus of people from the labor force amounting to 664,000 potential workers that exited the labor force in May. The number of people outside the labor force stood at a record high of 94.7 million in May!    The only silver lining was in wage inflation, where average hourly earnings rose by +0.2% MoM (+0.2% expected) but down from April's +0.3%, to $25.59. Average weekly earnings also posted a modest +2.3% YoY increase.    Full details from the BLS:    Total nonfarm payroll employment changed little in May (+38,000). Job growth occurred in health care. Mining continued to lose jobs, and a strike resulted in job losses in information.    Health care added 46,000 jobs in May, with increases occurring in ambulatory health care services (+24,000), hospitals (+17,000), and nursing care facilities (+5,000). Over the year, health care employment has increased by 487,000.    In May, mining employment continued to decline (-10,000). Since reaching a peak in September 2014, mining has lost 207,000 jobs. Support activities for mining accounted for three-fourths of the jobs lost during this period, including 6,000 in May.    Employment in information declined by 34,000 in May. About 35,000 workers in the telecommunications industry were on strike and not on company payrolls during the survey reference period.    Within manufacturing, employment in durable goods declined by 18,000 in May, with job losses of 7,000 in machinery and 3,000 in furniture and related products.    Employment in professional and business services changed little in May (+10,000), after increasing by 55,000 in April. Within the industry, professional and technical services added 26,000 jobs in May, in line with average monthly gains over the prior 12 months. Employment in temporary help services was little changed over the month (-21,000) but is down by 64,000 thus far this year.    Employment in other major industries, including construction, wholesale trade, retail trade, transportation and warehousing, financial activities, leisure and hospitality, and government, changed little over the month.    The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May. The manufacturing workweek increased by 0.1 hour to 40.8 hours, and manufacturing overtime was unchanged at 3.2 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.6 hours.    In May, average hourly earnings for all employees on private nonfarm payrolls increased by 5 cents to $25.59, following an increase of 9 cents in April. Over the year, average hourly earnings have risen by 2.5 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 3 cents to $21.49 in May.    The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month."    Business Of Finance on Facebook, 3 June 2016

"Here's the full story of the just released May NFP report by the BLS that saw the weakest jobs gains in more than 5 years and the biggest miss on consensus expectations ever! Markets are thoroughly reeling from this massive negative shock.

In May, a paltry 38,000 jobs were added, which was a plunge from April's downward revised 123,000 (previously 160,000).

The change in total nonfarm payroll employment for March was revised from 208,000 to 186,000, while the change for April was revised from 160,000 to 123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged only 116,000 per month, much lower than a year ago.

The household survey was equally bad, with only 26,000 jobs added in May, bringing the total to 151,030. This happened as the number of unemployed persons tumbled from 7,920,000 to 7,436,000, driven by a massive surge in people not in the labor force which soared to a record 94.7 million, a monthly increase of over 600,000 workers!

This caused the U3 unemployment rate to fall from 5% in April to 4.7% in May (4.9% expected) and is the lowest since 2007. Again, this was not because of jobs added but because the labor force shrank in size as a record number of Americans are now outside the labor force — A massive exodus of people from the labor force amounting to 664,000 potential workers that exited the labor force in May. The number of people outside the labor force stood at a record high of 94.7 million in May!

The only silver lining was in wage inflation, where average hourly earnings rose by +0.2% MoM (+0.2% expected) but down from April's +0.3%, to $25.59. Average weekly earnings also posted a modest +2.3% YoY increase.

Full details from the BLS:

Total nonfarm payroll employment changed little in May (+38,000). Job growth occurred in health care. Mining continued to lose jobs, and a strike resulted in job losses in information.

Health care added 46,000 jobs in May, with increases occurring in ambulatory health care services (+24,000), hospitals (+17,000), and nursing care facilities (+5,000). Over the year, health care employment has increased by 487,000.

In May, mining employment continued to decline (-10,000). Since reaching a peak in September 2014, mining has lost 207,000 jobs. Support activities for mining accounted for three-fourths of the jobs lost during this period, including 6,000 in May.

Employment in information declined by 34,000 in May. About 35,000 workers in the telecommunications industry were on strike and not on company payrolls during the survey reference period.

Within manufacturing, employment in durable goods declined by 18,000 in May, with job losses of 7,000 in machinery and 3,000 in furniture and related products.

Employment in professional and business services changed little in May (+10,000), after increasing by 55,000 in April. Within the industry, professional and technical services added 26,000 jobs in May, in line with average monthly gains over the prior 12 months. Employment in temporary help services was little changed over the month (-21,000) but is down by 64,000 thus far this year.

Employment in other major industries, including construction, wholesale trade, retail trade, transportation and warehousing, financial activities, leisure and hospitality, and government, changed little over the month.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May. The manufacturing workweek increased by 0.1 hour to 40.8 hours, and manufacturing overtime was unchanged at 3.2 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.6 hours.

In May, average hourly earnings for all employees on private nonfarm payrolls increased by 5 cents to $25.59, following an increase of 9 cents in April. Over the year, average hourly earnings have risen by 2.5 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 3 cents to $21.49 in May.

The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month."

Business Of Finance on Facebook, 3 June 2016

Our take & market reactions

Sometimes, when payroll reports come out bad, but not mega bad (such as April's, which was actually terrible by itself, but nothing compared to May's), they leave some wriggle room for market interpretations.

However, this report was so ugly that we feel it leaves almost no room for an alternative interpretation. Specifically, one of forgetting about a June rate hike. The Fed is almost certainly not going to hike later this month.

Everyone (including the BLS) talked about how the massive strike by Verizon workers contributed to May's depressing print. However, do understand that consensus forecasts had already factored in the impact of that strike which was widely documented, and was likely not undermined. We therefore do not believe that May's report was a complete outlier.

The 0.3% decline in the U3 unemployment rate should not be read positively. The rate fell due to an exodus of Americans from the labor force, causing the participation rate to fall once again to some 40-year lows, sending the number of people not in the labor force to another record high.

The modest level of wage inflation doesn't even iron out the pages in this badly frayed book. The fact that Fed Chair Janet Yellen had to take to the podium on Monday urging calm in the markets, is a testimony in and of itself to the magnitude of this disaster.

As you will see in the charts below, the markets went into the second half of May with heightened hopes for a June or July hike. We have talked a lot about such dynamics and will therefore not be repetitious here. Nothing much has changed as these dynamics are still the same.

  "The carnage after today's extremely terrible May NFP report. Rate hike odds (as implied by FF futures) have crashed with June only carrying a jokingly low 2% probability (down massively from 34% 2 weeks ago!), July carrying a 36% probability (down from 48% yesterday!), and September carrying a 26% probability (up from 15% earlier this week).    It would seem that the Fed is not expected to hike in June. While we were still holding our ground for. June hike, this utterly disastrous NFP print was the final nail in the fateful coffin — We are officially expecting a shift in the Fed's stance; more dovishness and ultra caution.    The market reaction was to be expected. Massive weakness in the USD, leading to explosive upside in the precious metals and USD crosses, downside in treasury yields and that of up-in-quality names, great volatility in stocks with financials lagging...    The Fed has hereby tossed the market around like a baby doll; dumping, pumping, and then dumping expectations of more monetary policy tightening. It's downright brutal!"    Business Of Finance on Facebook, 3 June 2016

"The carnage after today's extremely terrible May NFP report. Rate hike odds (as implied by FF futures) have crashed with June only carrying a jokingly low 2% probability (down massively from 34% 2 weeks ago!), July carrying a 36% probability (down from 48% yesterday!), and September carrying a 26% probability (up from 15% earlier this week).

It would seem that the Fed is not expected to hike in June. While we were still holding our ground for. June hike, this utterly disastrous NFP print was the final nail in the fateful coffin — We are officially expecting a shift in the Fed's stance; more dovishness and ultra caution.

The market reaction was to be expected. Massive weakness in the USD, leading to explosive upside in the precious metals and USD crosses, downside in treasury yields and that of up-in-quality names, great volatility in stocks with financials lagging...

The Fed has hereby tossed the market around like a baby doll; dumping, pumping, and then dumping expectations of more monetary policy tightening. It's downright brutal!"

Business Of Finance on Facebook, 3 June 2016

Rate hike odds have crashed to almost nothing for June — 4% currently (was 2% at the lows of last Friday). July odds have fallen from highs of 48% to 36% last Friday. This places more weight on September, but it's going to be much tricker and precarious to hike then, mostly because of the U.S. Presidential Elections.

The Fed mentioned that June's meeting would be "live"; that means taking into account May's payrolls disaster. Only a mindless FOMC member would vote to raise rates in such a cataclysm. We now officially do not see a June hike at all. We feel that a July hike is unlikely too, but aren't fully convicted yet.

Translating rate hike odds into moves in various markets, the initial (acute) knee jerk was massive dollar weakness (which persisted till the close of Friday), risk aversion (stocks, carry, credit all down), and anti dollar assets outperform majorly (precious metals, emerging currencies, and commodities especially crude).

  "Well, that just about sums it up. There's nothing equities don't like about Friday's morbidly bad May payrolls report. After the initial smash lower in risk assets, almost everything reversed abruptly as if the markets now expect the Fed to put off raising rates for the immediate future. A sigh of relieve was heaved. The dollar continues to be beaten lower, while gold and the other precious metals surge higher. Stocks are well above last week's highs and are set to attack their respective 2016 highs. Crude oil just made a new yearly high yesterday...    At this rate, no one will really believe the Fed by year's end. Talk about credibility..."    Business Of Finance on Facebook, 8 June 2016

"Well, that just about sums it up. There's nothing equities don't like about Friday's morbidly bad May payrolls report. After the initial smash lower in risk assets, almost everything reversed abruptly as if the markets now expect the Fed to put off raising rates for the immediate future. A sigh of relieve was heaved. The dollar continues to be beaten lower, while gold and the other precious metals surge higher. Stocks are well above last week's highs and are set to attack their respective 2016 highs. Crude oil just made a new yearly high yesterday...

At this rate, no one will really believe the Fed by year's end. Talk about credibility..."

Business Of Finance on Facebook, 8 June 2016

As we've shown in the above chart, the follow through (as of Tuesday) has mainly been concentrated to a weak dollar, and strong anti-dollar assets. WTI is pushing $50, the highest since July 2015, while gold and silver are attacking key technical resistances. Risk off flows mostly dissipated by Monday, and most equity indices are up strongly from Friday's lows.

Concluding

In the immediate aftermath of April's payrolls, we said the following:

"For now, we are still sticking to our bearish dollar bias but do so with extra caution...
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."

It turns out that we were pretty accurate on our take.

With the addition of May's payrolls, we are outright bearish the U.S. dollar and will be looking for good opportunities to gain some short exposure. We are of course fully ready to stop dead in our tracks and turn on a dime, as must be expected when dealing with such troll-worthy elements.

Sellside bonus

Post analysis note from Goldman Sachs:

Weak May Payroll Report Likely to Stay Fed’s Hand in June
BOTTOM LINE:
  • Nonfarm payroll employment increased by just 38k in May, far below consensus expectations.
  • The unemployment rate fell to a new cyclical low due to a drop in labor force participation.
  • In light of the weaker-than-expected employment report, we have revised our subjective odds of the timing of the next FOMC rate increase.
  • We now see probabilities of 0% for June, 40% for July, and 30% for September.
MAIN POINTS:
  1. Nonfarm payroll employment increased by just 38k in May, well-below consensus expectations for a 160k increase. Earlier months were also revised down by a net 59k, making the result much weaker than expected overall. Employment in telecommunications related jobs declined by 37k, reflecting the strike at Verizon Communications. However, the weakness extended much beyond that category. Goods-producing employment fell by 36k—the largest decline of the recovery—with declines in each of its major components (mining, construction and manufacturing). Excluding the Verizon strike, employment in service-providing industries increased by 98k, down from 144k in April. Temporary help services jobs contracted by 21k, and growth in trade/transportation/utilities was unchanged. A small number of categories improved: education and health employment gained a solid 67k and government employment rebounded, with a 13k following a 7k drop in April.
  2. Average hourly earnings increased by 0.2% (mom), or 2.5% from a year earlier. The 12-month gain was above our expectations due to upward revisions to prior months. The average workweek was unchanged at 34.4 hours.
  3. The household survey measure of employment gained just 26k after a decline of 316k in April. However, because of another decline in labor force participation, the unemployment rate fell to a cycle low of 4.7% (4.692% unrounded). At this level the unemployment rate is now in line with Fed officials median projection for end-2016, and below their longer-run estimate (from the March FOMC meeting).
  4. In light of the weaker-than-expected employment report, we have revised our subjective odds of the timing of the next FOMC rate increase. We now need see probabilities of 0% for June, 40% for July, and 30% for September. Although the report lowers the odds of near-term action, in our view, it also arguably raises the range of possible outcomes. If employment growth rebounds next month but the unemployment rate remains low, the case for hiking after June would become quite strong. Alternatively, if sluggish employment growth were to persist, the FOMC could remain on hold for longer than we currently expect.