The much anticipated non-farm pay roll report threw the interest rate cat well and truly to the pigeons. Expectations were for around 160,000 jobs to be created in May; in the end the figure reported was 38,000. The picture was further clouded by a weaker than expected service Purchasing Managers Survey Index reading for May. The unemployment rate did fall further to 4.7%, however the Financial Times reported this was due to a big fall in the labour force. Friday’s data will take away the possibility of a hike in June, and most probably July. The problem then comes the holiday season, followed by the Presidential election. The Federal Reserve does not like to hike rates in an election year. So the market will go from wondering June or July, to now discounting any move probably until December.
The currency and bond markets moved pretty much as one would have expected on this data, the US dollar weakened, the 2 year treasury rose as yields fell back again. After an initial dip, US equities stabilized and finished the day marginally lower. All this meant leading equity markets in Europe, the US and UK all finished the week lower. The Vix or fear and greed index finished the week little changed from the start of the week.
Post Mario Draghi’s dovish press conference on Thursday, this probably leaves the interest rate picture looking much like it has for some time now.
Looking to the week ahead, as we do, the main feature may well be at the start of the week as Janet Yellen, the Fed Chair, will address the World Affairs Council of Philadelphia. After the more hawkish tone of the past weeks, it will be interesting to hear if this lady’s for turning post Friday’s data. It is a quieter week for US data in the coming week. On Friday we get the results of the preliminary Michigan Consumer confidence reading for June.
For the UK the expectation will once again be around Brexit, and during the week there several television programs dedicated to allowing all sides to present their argument, again. We do also get industrial production for April, current economic reports appear clouded by the Brexit vote, and therefore are probably of little real guidance.
As for Europe, on Tuesday we get the 3rd estimate for Q1 growth for the euro area. Expectations are for a small uptick from the 2nd estimate of year on year growth.
Indications on Sunday evening are that equities will open Monday morning pretty much where they finished Friday night.