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U.S. unemployment rate falls to 4.3% clearing path for Fed to raise interest rates

The US economy added 138k jobs in May, well below the market consensus of 182k jobs. In addition to the unemployment miss, there were downwards revisions to both March & April data prints of approximately 66k jobs. In the first 5 months of 2017, jobs gains have averaged 162,000, inclusive of the downward revisions for March and April.

The unemployment rate derived from a separate survey of households declined to 4.3%, which remains at historic low levels, last realized in 2001. Though there have been improvements in the labor market, the historically low unemployment rate has been aided by a low participation rate of only 62.7%.

The broader unemployment, which includes among others – discouraged workers and part time workers who are seeking full-time jobs fell to 8.4%, the lowest since November 2007. In December 2016, the broader unemployment rate was at 9.2% and has improved by 0.8% in the last 5 months.  Just to keep things in perspective, broader unemployment peaked at 17.1% in March 2010 at the height of the financial crisis and has steadily improved over the last several years. During the boom period before the financial crisis, the lowest boarder unemployment achieved was 8.0% in March 2007. The trend of broader unemployment shows strong job growth, which is fueling consumer demand and spending, specifically for large ticket items – homes and autos.

The June unemployment report provides a clear path for the Fed to raise interest rates at the June 14th FOMC meeting.  Recent rhetoric by FOMC members also suggests that most members believe that the economy is strong enough to withstand another rate increase. 

For U.S. dollar bulls, the expected hike on the 14th won’t help the U.S. dollar unless the Fed suggests that more tightening is on the way, which is unlikely given the current lack of economic performance.

Market reaction

The 2-year U.S. Treasury yield (the most sensitive to Fed rate hikes) closed the Friday trading day largely unchanged in contrast to the 10 -year yield which closed the trading day lower by 5 basis points indicating a pared expectation of additional rate hikes after June.

 

In currency markets the U.S. Dollar weakened sharply against most currencies but held steady against the Canadian dollar. The Canadian Dollar was impacted by weak trade data and lower oil prices which continue to depress the value of the loonie.  The trade deficit in April was higher than expected at $370 million and the trade deficit for March was revised sharply higher. Oil also continues to dampen any meaningful rally for the loonie and in the short term will continue to deter any meaningful loonie upside.  From a fundamental perspective, the Canadian economy continues to be driven by leveraged consumer spending largely on homes and cars which has resulted in warnings from the IMF and downgrades by the S&P on the big five Canadian banks. 


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