Disappointing US employment growth

US non-farm payrolls figures for May were very disappointing, and showed the weakest monthly employm

(06.06.2011) US non-farm payrolls figures for May were very disappointing, and showed the weakest monthly employment gain since September last year. Meanwhile, the dollar weakened broadly in FX on Friday.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

The dollar weakened sharply Friday, especially versus the euro, which also saw support from signals of agreement on a new Greek bail-out. EURUSD has remained high over the weekend, and is currently traded above 1.46, versus below 1.45 Friday morning.

Negotiators for the IMF, the European Commission and the European Central Bank, announced that they expect a new loan-tranch (from the existing bail-out plan) to become available, most likely, by early July – obviously not enough in the longer run, but sufficient to calm financial investors somewhat on Friday. Furthermore, during the weekend several media has reported that the IMF/ECB/EU is about to agree on a fresh bail-out that will secure financing until 2014. A key dispute in these negotiations is whether the package will contain a so-called re-profiling of Greek debt, which implies that creditors will be asked to accept an extension of the debt maturities. The details will probably be completed at a meeting on 20 June.
 
The euro gains versus the dollar Friday must also be seen in light of the very disappointing US labor market report. Non-farm payrolls increased by only 54' in May, versus an expected rise of 150' according to Reuters. The figures for both March and April were also revised down somewhat. The public sector was (as usually lately) the biggest negative contributor, with a decline of 83'. But this can not alone explain the weak headline figure – employment growth was weak across the board, for all sectors.

The unemployment rate, calculated from an alternative survey, also disappointed, with a rise from 9.0 per cent in April to 9.1 per cent in May (versus an expected decline to 8.9 per cent). The downward drift in the unemployment rate in recent month thus come to an end. Admittedly, the small uptick in May was not entirely discouraging – it was not caused by a decrease in employment, but rather a fairly sharp increase in the labor force.

While the payrolls figures clearly disappointed, the non-manufacturing ISM surprised positively. The index rose from 52.8 in April to 54.6 in May, versus expected 54.0 (Reuters). The increase was broad based and sub-indices like employment and new orders were among those that increased the most.

But this last figure seems most like an exception from the recent trend in the key figures, which clearly indicates the US economic recovery has entered a new “soft-patch”. Our main hypothesis is still, however, that economic growth will pick up again later in the year, at least somewhat. Thus, we do not expect a double-dip. Temporary factors such as bad weather, sharp rise in energy prices and delivery problems from Japan, has probably weighted on activity so far this year. Still, our growth scenario will not be strong enough to generate rapid improvements in the labor market, which still is characterized by a large slack. Thus, we also believe that it will take time before the Fed begins to tighten policy, and the first rate hike is not expected until summer next year.
 
As often the case, the week after the non-farm payrolls release is rather thin when it comes to new macro economic indicators. Some events, however, is worth noting. The international highlight is likely to by Thursday’s ECB policy meeting. The central bank has already raised interest rates once this year (in April), but hardly nobody expect any real policy changes at this meeting. The question is rather whether Governor Trichet will signal a new hike at the next meeting, in July. A clear signal of that will be the use of the "strong vigilance" phrase.

The Committee of the Bank of England will also meet for a new policy decision this week.

Of Norwegian event, we should mention tomorrow’s release of figures for registered unemployed in May, in addition to Statistics Norway’s CPI inflation figures, which are issued Friday.