Treasurys Rally as Payroll Data Misses Growth Expectations

The US jobs report released today displayed a meager 138,000 seasonally-adjusted increase in nonfarm payrolls for the month of May, nearly 50,000 lower than expectations.  In addition, 66,000 in downward revisions were made to the previous two months figures, bringing the average monthly payroll additions in 2017 to 162,000, compared to 2016’s monthly average of 187,000. The unemployment rate stood as the lone positive indicator from the data, falling to its lowest reading in over 16 years at 4.3%, after initially projected to hold steady at 4.4%.  The low levels of unemployment did not translate into higher wages unfortunately, as the average hourly earnings rose a marginal 0.2% during May, matching the previous month’s downwardly revised figure.  The participation rate similarly disappointed, declining 0.2% from April to 62.7% and in so doing, contributed to the low unemployment reading.  Overall, today’s soft labor data release is not expected to alter the current projection for a rate hike by the Fed at its meeting in two weeks, as the currently probability per the CME FedWatch tool remains above 90%.  Additionally, Philadelphia Federal Reserve Bank President Patrick Harker (voter) confirmed his support for two additional rate hikes in 2017 during a speech at a conference in Pennsylvania earlier today.  Harker stated his expectation that inflation would recover back towards the 2% target by the end of the year and labeled the current economy as “essentially at normal.”

US Treasurys rallied immediately following the release of the payroll data.  Yields/swaps rates are currently down 1-7 bps across the curve in a bull flattening pattern, pushing the yield on the 10-year note to 2.15%, its lowest level since early November.  Gold similarly rallied in the flight to quality, with gold futures increasing 0.5% on the day.  The dollar declined 0.4% against major currencies, bringing its value back down towards pre-election levels. US stocks appeared immune to the soft data, as all three major indices reached new records highs during the session and are currently up 0.3%-1.0%.  Crude oil futures fell another 1.5% on the day, with bullish sentiment declining as increased US production and the rejection of the Paris Climate Treaty led the headlines.  WTI crude is now trading near $47.60/barrel after posting its largest weekly loss in a month.