A Wanted Help sign is posted on a taco stand in Solana Beach, California.
Mike Blake | Reuters
The number of new hires improved in May, but the 559,000 new jobs were not strong enough to cause the Federal Reserve to talk about curbing its bond purchases.
The report, which is below the expected 671,000, was also not weak enough to cast serious doubts on the economic recovery, despite highlighting the underlying problems of labor shortages and job mismatches.
The moderately strong data helped push stocks slightly higher and government bond yields tipped before falling. The 10-year benchmark return fell to 1.58%. The returns move against the price.
John Briggs, global head of desk strategy at NatWest Markets, said the report was “goldilocks” for risky assets and “not too hot to bring in the Fed and not too cold to worry about the economy”.
“You’re in a zone where it’s okay. It’s better than it was last month,” Briggs said. “It’s not that it’s 1.2 million and it won’t scare us for the Fed. The next event is next week’s CPI and people will worry that it is strong.”
Hotter-than-expected inflation data, like April’s consumer price index, has helped fuel speculation that the Fed may start talking about tapering its bond purchases. The May CPI will be announced on June 10, and it will follow the strong headline pace of 4.2% for April.
Some strategists believe the central bank may be ready to talk about reducing bond purchases if they move to Jackson Hole Business Symposium Late August, but some market pros said a very strong employment report could have put the issue on the table when the Fed meets on June 15th and 16th.
The Fed’s intention is to first discuss reducing its $ 120 million monthly bond purchases before taking action. It would then spend many more months reducing the size of its purchases. At the end of that period, the Fed could be well on its way to considering a rate hike that the market is not expecting until 2023.
In the May report, the unemployment rate fell from 6.1% to 5.8%, while the employment rate fell slightly to 61.6%. The April jobs increased from 266,000 to 278,000 but were still about a quarter of those expected for this month.
“Certainly these are not the ‘million jobs per month’ that looked like the base scenario expectation for late spring prior to the April salary data, but it is not a disaster either,” said Jefferies economist Thomas Simons. “The data is in line with other indicators of a previously well understood labor shortage that should subside somewhat as the expanded unemployment benefit programs run out all summer.”
Michael Gapen, chief US economist at Barclays, said the May report was meeting his expectations and he saw a steady hiring pace over the coming months. “If I had any concerns, the labor force participation would be ticked lower again. There are still many biases and imbalances in the labor force. This is a long-term question for me, ”he said. “Can we get people back in? Are we currently underestimating the tensions in the job market? I think it will work on its own. It can take two or three months. It will just take time for the matching process to take place.”
Gapen said he doesn’t expect millions of job creation numbers to skyrocket in the coming months, and he doesn’t expect the Fed to focus any more on reducing its asset purchases.
“I don’t think the June tapering discussion will be too lively,” he said. “I think that number is telling them the hiring rate is solid but not spectacular. It will keep moving forward and they should hold on now.”
Gapen also doesn’t think next week’s CPI report will spur the Fed to act any earlier than expected. “I think it will be strong. It will reflect some normalization in service prices that were depressed during the pandemic, ”he said.
The Fed has announced that it is anticipating a phase of higher inflation that will prove to be temporary. April and May values should be higher than normal, in part due to comparisons with the weak values last year.
Economists have been watching wage data for signs of inflation. The average hourly wage rose 2% year-on-year.
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