US labour market experiences a soft patch

Friday’s US labour market report for May disappointed heavily. The change in nonfarm payrolls hit a six-year low.

This is the second disappointing reading in a row and we expect the US labour market to experience a soft patch during summer. The labour market now reflects the cyclical weakness which the US experienced in the first months of the year. We have highlighted in the past that labour market data are lagging indications for economic activity.

The markedly disappointing change in nonfarm payrolls with only +38,000 against consensus expectations of +160,000 can easily be put into perspective. Usual monthly volatility, possible significant upward revisions and a strike at Verizon are viable arguments to play down the number.

But the details of the labour market report reveal a remarkable broad-based slowdown in job creation, which matches the indications from fewer job openings and a slowdown in online advertised vacancies.

The recent pick-up in US economic activity − with ISM readings consistently above 50 and the new order component even above 55 in the last three months − gives reliable signals that the US labour market will be able to overcome its soft patch towards the year end.

Until then it will be difficult for the US Fed to continue with rate hikes despite ongoing comments from Fed officials expressing a preference for rate normalisation. This contrast between the Fed’s determination and the economic necessity for higher rates causes rising volatility.

David Kohl is chief currency strategist and head economist Germany at Julius Baer.

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