Weak jobs data could keep the Fed on hold until December

The May U.S. jobs report was unambiguously terrible at every level. The United States added only 38,000 jobs to the economy last month.¹

I generally look straight through that headline figure, but this one was so low I did a double take to make sure it wasn't meant to be 138,000—which would have been a disappointing result in its own right. It was no typo, and the underlying data was no better. The upshot of such a disappointing result is that we believe there is little chance the U.S. Federal Reserve (Fed) will hike rates in June. If economic data is strong over the next few weeks and core personal consumption expenditures (PCE) numbers are robust, the Fed could possibly hike rates in July, but the more likely outcome, we believe, is a single 0.25% hike in December.

In addition to a soft headline figure for May, the employment data for April was significantly revised down as well. While total hours worked and wage growth had seemed reasonably strong in April, both of those positive indicators were revised away this month. As for the most recent reading, the poor headline figure in May was partly the result of a strike at Verizon, which removed 35,000 new positions from the labor force. But even had this not been the case, the May jobs data would still have been incredibly weak. While the unemployment rate fell from 5.0% to 4.7%, this was largely because a number of people gave up looking for work and left the labor force. Consequently the labor force participation rate fell from 62.8% to 62.6%, erasing most of the recent modest gains in that area.

In terms of the composition of new jobs added in May, 31,000 of the 38,000 new jobs were in low wage leisure, retail, and social assistance. Average hourly earnings were more or less flat, growing by just 0.2% month over month. Meanwhile, the number of people working part time for economic reasons jumped significantly, by 468,000.

The May jobs report, combined with close opinion polls for the United Kingdom's referendum on whether it should remain a member of the European Union on June 23, makes it very unlikely the Fed will announce a rate hike at its next meeting on June 15, as we had expected. Data leading up to the May jobs report had been mixed, with manufacturing underperforming, but consumer spending remaining strong. If, by the time the Fed meets again in July, economic indicators are stronger and core PCE overshoots the Fed's 2% inflation target, it is possible the Fed could hike rates then. Still, this seems unlikely, not only because there is little reason to expect robust data, but also because the Fed will be reticent to hike rates at a meeting that does not have a press conference.

The more likely option is that the Fed will have to wait until December to hike rates. After June, the next Fed meeting with a press conference is in September, but there will be pressure on the Fed to not hike rates just months before the U.S. presidential election. We therefore expect there will only be one rate hike this year in December; our prior predictions had called for two moves.

Whether the Fed hikes rates in July or December, we expect the U.S. dollar (USD) to ultimately strengthen. Following last Friday's jobs report, the USD weakened significantly as the probability of a June hike plummeted. Given that the Chinese renminbi (RMB) is pegged to the USD, the RMB weakened as well, leading to upward pressure on the Japanese yen and euro. If the USD and RMB continue to remain weak, the Bank of Japan and European Central Bank could ease monetary policy further to depreciate their own currencies. This won't make the Fed's job any easier: A relatively strong USD will continue to weigh on U.S. growth and stifle exports, making it even harder for the Fed to normalize monetary policy.

1 U.S. Bureau of Labor Statistics, June 2016.