Does the Latest U.S. Jobs Report Make a Rate Cut More Likely?
On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Rob Cittadini, director, Americas institutional, discussed May’s U.S. employment report, the latest headlines around trade and the recent rally in equity markets.
Lackluster May jobs report may help pull Fed from the sidelines
The U.S. economy added just 75,000 jobs in May, Robison said—far below the consensus estimate of 160,000. The modest addition was even short of the replacement rate—the estimated number of new jobs needed each month to keep up with population growth—which stands at 100,000, he stated. “May’s jobs number is even more disappointing in light of the fact that this data was collected prior to the recent trade-war escalation,” Robison added.
The U.S. Federal Reserve (the Fed) has already been grappling with economic uncertainty due to trade policy and a slump in capital-expenditure spending, he noted. “This employment report only adds to the growing list of downside risks for the central bank to think about,” Robison said, adding that this likely increases the probability of a Fed rate cut.
Trade-war fallout: The impacts on business spending
Trade rhetoric dominated the headlines again this week, Robison noted, as U.S. President Donald Trump doubled down on his threat to potentially impose a 5% import tariff on all Mexican goods as soon as June 10. “This plan is meeting a lot of resistance in the U.S. Congress,” he stated, “so it’s increasingly difficult to assess when these tariffs may be enacted, let alone how long they may stay in place.”
On the China front of the trade war, Robison noted that the U.S. currently has imposed a 25% tariff on $250 billion worth of Chinese goods. “The U.S. administration has also threatened to slap tariffs on an additional $300 billion worth of Chinese goods, which would mean all imports from China would face a tariff,” he added.
China is America’s largest trading partner, with Mexico coming in second, Robison said. “Together, the two nations account for roughly one-fifth of all imports to the U.S.,” he stated, “and this has led to heightened uncertainty in business spending as the trade war continues.” As an example, he noted that one company surveyed in the most recent Institute for Supply Management (ISM) manufacturing report stated that it would move its production out of China, as a result of the U.S. tariffs. “The company stated it would shift production efforts to Mexico—but this was before the U.S. threatened to impose tariffs on all Mexican imports,” he said.
In short, the trade war is creating a disincentive for companies to spend, Robison explained, thereby lowering investor sentiment. This, in turn, has led to an inverted U.S. Treasury yield curve, with longer-term yields falling below shorter-term yields. “This makes banks less likely to lend, leading to tighter spending among consumers and businesses alike—which can act as a drag on the economy,” he concluded.
Markets rally on hopes of rate cut
Despite the generally negative headlines, Robison said that equity markets have been trending upward over the past week. “It appears that the surge in equities is being driven by the increasing probability of a Fed rate cut—due in large part to trade policy and slowing economic growth,” he said. Robison noted that, according to CME Group, futures traders see a 95% chance of a reduction in interest rates by the end of September. “The market is probably pricing this in, fueling the recent rally,” he concluded.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
Indexes are unmanaged and cannot be invested in directly.
Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
Copyright © Russell Investments Group LLC 2019. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.