*May Unemployment Rate: 7.6% vs 7.5% exp
Despite the US economy adding more jobs than expected for the month of May, the breakdown and trend are still meager. We're not out of the woods yet, and at this pace, the Fed is less likely to back down without significant labor market improvements.
There was not much excitement on the headline figures, but it does show that the trend in payrolls is broadly flat. The breakdown shows consistent gains in the service sector with low wage jobs capturing a larger share of the labor market. After looking at the employment reports from the past few months, the May report provides further proof that QE efforts are providing little help to boost employment. The Fed is clearly looking for significant improvement to break above trend in labor growth; unfortunately the monthly change in nonfarm payrolls is not enough to sustain a recovery. We will need to see consistent gains above the 200k level supported by wage growth and other economic improvements for the Fed to send a clear signal of optimism. Even so, the worry still remains that monetary stimulus has gone too far and perhaps we will need stronger fiscal policy to help speed up a recovery.
The markets believe that the Fed is less likely to ease off the pedal given recent data. FX markets were choppy with the USD given a modest boost with most pairs. Treasuries pared earlier gains as yeilds moved higher with the 10yr up 3 basis points to around 2.12% following the employment report. Yields have bounced off 1.60% support to show a firm rise for May as the bond sell-off leaves many in question. It's really all about the Fed at this point, and the summer FOMC meetings will be very important for any sway or persistence on the scale of asset purchases. Remember the weak ISM report sparked an initial safety run to treasuries, but the rise was short lived as the markets remain weary over an indecisive Fed. Stocks opened firmly in NY, giving a clear signal for the Fed to remain in action.
We still have a recovering housing market, but pay attention to 30yr mortgage rates nearing the 4% mark which could slow the recovery. Many investors are driving the demand for new homes, so the underlying picture of broader economic growth is still in question. Consumer spending is picking up, but we still have some fiscal problems looming with sequester cuts having a negative impact as well.
Canada - Hold your applause
The employment picture looks a lot better north of the border as Canada added 95k jobs in May, mostly full-time. Unemployment inched down to 7.1% with construction adding 43k jobs in May, marking a 5.8% rise y/y.
Although this is a stellar report, worries still remain about the housing bubble, especially given the rapid growth in construction jobs. Construction has been the main driver of these good headline prints, and we have to wonder about what this means for future supply of new homes as the demand side grows a little skeptic.
A report by the OECD labels Canada as the third most overvalued real estate market in the developed world - no surprise there. Look back at April 2013 building permits which shows that Canadian municipalities issuance was up by 10.5% from March due to higher construction intentions for multi-family dwellings. The total value of permits is now back above trend. Meanwhile, declines in institutional and industrial construction remain. Household debt and expenditures are troubling, yet there is more housing supply on tap. You can keep building, but home buyers are aware that prices are just too high to enter right now, and will eventually force that much needed correction in housing prices.
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