Jobs data affecting the probability of a rate hike

We have a very interesting day today – the US jobs number came out, and there was a huge negative surprise. The market had an expectation of adding 160,000 jobs, but the actual number of jobs added was only 38,000, a huge disappointment. Over the past year, we have averaged a growth of 150,000 - 200,000 jobs in the USA, this is a shock to the system.

 

The chart below is a 1-year tracker of monthly job growth in the USA, the world's leading economy. Verizon has a strike, which accounts for 35,000 workers, bringing the decrease closer to 75,000. It is hard to say with certainty why the decline would have happened so suddenly. Two possible explanations are an error in the report, or at 4.7% unemployment, the USA has reached peak employment and we may have to lower overall expections going forward. However, neither explanation covers the wild decrease in job growth.

Source: Bloomberg

The chart below displays the payroll numbers going back 10 years, including the massive drop during the Financial Crisis.  As you can see we have had a great recovery constantly adding roughly 200,000 jobs.

Source: Bloomberg

The screenshot below illustrates the probability of an interest rate hike in the USA, before Friday’s Jobs Report was released. Based on this information, the probability of a rate increase becomes greater towards the end of 2016. 

Source: Bloomberg 

Here it is today after factoring the weaker than expected job data – one day later and the probability of a June and July rate hike has dropped massively.

Source: Bloomberg

We continue to believe the Federal Reserve will hike interest rates in July, and we have designed the portfolio to take advantage of rate hikes “when” they happen not “if" – this may have added a decent wait to our “when”. Although we do not have a solid explanation for the rapid decline in job growth, it does not destroy the growth in the economy or market. The next phase of growth we can begin to see would be wage growth once full employment is in place. If we are in fact there now, this will be a transition period, not a decline period.

 

We actually anticipate seeing the market move higher despite this bad news.

 

Happy to discuss if you would like to call in.

Chris, Rick, Steve

416-572-5429

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