The dollar has been trading on the defensive for most of June 2019, as traders continue to price in multiple rate cuts for the balance of 2019. While there is only a 20% chance that the Fed will cut rates in June account to the futures market, the chances substantially climb in July. The recent economic data released in the US has led the markets to believe that the Fed is currently well behind the curve, as the US yield curve is pricing in a recession. The Jobs data for May was released in early June and it points to a slow US economy.
US Jobs Rose Less than Expected
The May US employment report came out much weaker than expected to put downward pressure on US yields and continue to weigh on the dollar. Currency trading was volatile following the jobs report. According to the US Department of Labor, US Non-farm payrolls rose by 75,000 jobs in May. This compared to the expectation that it would increase by 175,000. To add insult to injury, both the April and March figures were revised down by approximately 75,000 jobs, essentially making job growth flat for May. The 3-month average of the past three months is approximately 150,000 jobs which are down by 50,000 from 2018.
The Labor Department also reported that the unemployment rate held steady at 3.6%, a half-century low. This is a separate household report. The labor-force participation rate was unchanged at 62.8% in May. Private-sector workers saw average hourly earnings rise 3.1% from a year earlier, or 0.2% month over month. The U6 fell, which also includes discouraged workers fell to 7.1% in May from 7.3% the prior month.
What is clear is that tariffs are taking their toll on the global economy which is weighing on US growth. Jobs growth has slowed to the lowest its seen in more than a decade. Jobs growth is now on the decline and the markets are looking for the Fed to begin to ease rates to help accelerate job growth. The Fed has the luxury to attempt this policy, as inflation remains below its target rate. The last reported Personal Consumption Expenditures report, released by the Commerce Department, shows that the Fed’s key inflation gauge is running at 1.6% year over year.
The Yield Curve Inverts
The worse than expected jobs data also helped further invert the US yield curve. Generally, as the tenor of the bond increase, the yield on the bond also increases. This is because there is more insecurity with longer dated loans. So, when economic growth is accelerating, the yield on the 10-year bond will be more than the yield on the 3-month bill. When the rate on the 10-year bond falls below the rate on the 3-month bill, the market is telling investors that short-term issues are riskier than long term risk. An inverted yield curve generally points to a recession. If the US yield curve continues to invert, the likelihood of a recession will substantially increase.
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