Strong Risk Off Tone Following Dismal May Payrolls Report

US stocks are trading under pressure while Treasurys are rallying emphatically after a much weaker-than-expected May payrolls report raised concern over the health of the US economy and the Fed rate hike outlook.  The Labor Department’s report showed employers added only 38,000 jobs last month, the fewest in nearly six years, and well below economists’ forecast of 164,000.  The report showed a broad-based hiring slowdown, led by declines in the troubled construction, manufacturing, and mining sectors.  Adding to the weakness of the report, April payrolls were revised down to 123,000 from 160,000 previously reported.  The headline unemployment rate fell from 5.0% to 4.7%, largely due to Americans leaving the labor force.  Expectations of a summer rate hike were significantly diminished following the release of the report.  Trading in Fed funds futures implies only a 30% chance of a hike in July, down from 55% chance the previous day, while odds of a June hike have declined to 6% from 20% pre-payroll print.  The UK referendum vote scheduled for June 23rd had already cast doubt on the Fed’s willingness to raise rates in June, and this report appears to further reduce the chance they would make a move this month. 

Following the dismal payrolls report, Fed Governor Brainard (dove, voter) is scheduled to speak on the economic outlook and monetary policy at 12:30pm ET, and Fed chair Yellen is set to speak Monday afternoon.  All three major US stock indexes are currently down between 0.60% and 0.90%, while Treasury yields and swap rates are 5-12 bps lower across the curve in a bull-steepening pattern.

Have a great weekend.