US jobs report puts Fed hike expectations on ice

Market expectations of a Federal Reserve rate hike this month have dropped after a patchy spell of data was capped with a disappointing US jobs report on June 3.

Non-farm payrolls grew by just 38,000 in May, while the figures from April and March were cut by a combined 59,000. Average monthly growth over the period was 116,000, compared with 220,000 a month in the 12 months to February.

Nonetheless, the unemployment rate dropped to 4.7%, though this partly reflected a drop in the labour force participation rate to 62.6%, and an increase in the number of involuntary part-time workers to 6.4 million.

"The data in today's labour market report on balance suggest that the labour market has slowed," Fed governor Lael Brainard told an audience in Washington, DC, after the report was released.

In the wake of the report, market participants have all but written off the prospect of a rate hike when the Federal Open Market Committee (FOMC) meets on June 14-15. Fed fund futures suggest the perceived likelihood of a hike is less than 4%.

This rises to around 30% for the July 26-27 meeting. Fed chair Janet Yellen last month hinted an increase would be appropriate "in the coming months", while minutes from the FOMC's April meeting indicated officials were open to the idea.

Markets will look to Yellen's speech later today (June 6) for more clues. Brainard suggested the risks associated with waiting for more information were lower than the risks associated with tightening on the back of recent data.

"Recognising the data we have on hand for the second quarter is quite mixed and still limited, and there is important near-term uncertainty, there would appear to be an advantage to waiting until developments provide greater confidence," she said.

Federal Reserve Bank of Boston president Eric Rosengren also commented on the report today, noting it was "disappointing". Nonetheless, he said, the non-farm payrolls were depressed by around 35,000, owing to a strike at Verizon. Rosengren is also keen for more data.

"Given that the labour market contrasts with the pattern in the first quarter, and the pick-up in spending observed so far from other data, it will be important to see whether the weakness in this report is an anomaly or reflects a broader slowing in labour markets," he said.

Brainard felt the labour market had moved closer to full employment, while it was likely "the labour supply still has room to respond if labour demand increases". She highlighted the potential for the employment-to-population ratio to increase for "prime-age workers".

Beyond labour market data, Brainard was concerned the "recent news on inflation" was also "mixed". Despite some "encouraging signs" around aggregated demand, the data relevant for second-quarter growth was "still relatively sparse", she added.