US: NFP and ISM non-manufacturing reports heighten growth concerns - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has weakened sharply following the release of the much weaker than expected non-farm payrolls report for May which has brought an abrupt end to its recent rebound.

Key Quotes

“Employment growth slowed sharply to 38k jobs in May which was weak even after adding back the 35k striking Verizon workers. There was also a net downward revision to prior months totalling -59k jobs. As a result it is clear that employment growth has slowed so far this year averaging 150k jobs per month compared to 229k per month in 2015.

The softening in the pace of employment growth will make the Fed more cautious about resuming rate hikes in the near-term. A June rate hike now appears off the table and the market is attaching just less than a one in three probability of a rate hike in July. With the Fed less likely to resume rate hikes in the near-term it leaves the US dollar vulnerable to the downside.

Market attention will now focus on a speech today from Fed Chair Yellen for an update on the outlook for Fed policy. In a previous speech Fed Chair Yellen had stated that a rate increase would be appropriate “probably in the coming months” if the economy and labour market continue to strengthen. In light of the latest disappointing economic data releases Fed Chair Yellen is likely to strike a more dovish tone today weighing further on the US dollar.    

After rebounding solidly early in Q2 the US economy appears to have again lost upward momentum which is consistent with weaker employment growth this year. The ISM non-manufacturing survey revealed that business confidence declined more sharply than expected by 2.8 point to 52.9 in May reaching its lowest level since February 2014. It follows renewed weakness in the ISM manufacturing survey that together have resulted in the composite measure declining to just 52.7 in May which is more consistent with weak economic growth of closer to an annual rate  of 1.0%. If the economic weakness if maintained or even intensifies in the coming months it will argue strongly against the Fed resuming rate hikes at all this year.”