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Weak employment report rules out June rate hike

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The US labor market hit a major bump in the road in May after employers’ added only 38,000 jobs, the lowest rate of job creation since the housing crisis. This came as a surprise as Economists’ estimates were calling for job growth in the neighborhood of 160,000 jobs. Making matters worse, the U.S. Labor Department also made downward revisions to job gains in April and March, lowering Non-Farm Payrolls down 37,000 and 22,000, respectively.  Perhaps the lone bright spot of the May report came from the unemployment rate, which fell to 4.7% from 5.0% a month ago, but once you consider that nearly 500,000 people left the labor pool, that number also provides proof of a deteriorating labor market.

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Markets have reacted as one might expect with stock markets and interest rates moving lower post-employment report. Prices of mortgage backed securities gained a half point in price, pushing mortgage rates down by 1/8th percent.  The yield on the benchmark 10 year note also fell by nearly 11 basis points.  The stock market, which has been the beneficiary of quantitative easing and an accommodative Fed, has rebounded from the sell-off immediately after the Employment Report.

If the Federal Reserve didn’t have doubts about the appropriateness of raising interest rates at next week’s FOMC Rate Decision yesterday, the May Employment report certainly served as a wake-up call.  Today’s employment report sparked a bond rally all over the world, sending investors into the safe haven of government bonds.  This rally was most notable in short maturities, those more closely related to the Fed Funds rate.  If you asked two-year notes – whose yield plunged 12 basis points this morning – about whether or not the Fed will hike rates next week, they would undoubtedly say ‘no’.  And so would I.

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