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Now that the labor market has long resisted and shows signs of tension, economists and investors firmly believe that the Federal Reserve will lower its rates this year, as early as next month.
The economy has created only 75,000 jobs in May, about 100,000 less than expected, indicating that the slowdown in other sectors of the economy is now affecting the economy. labor market.
"I think there is a real slowdown in hiring right now. Sometimes you can ignore the monthly volatility, but I think we have enough of it." indications, "said Luke Tilley, chief economist at Wilmington Trust. He said that the slowdown in hiring corresponds to the slowdown in ISM manufacturing and other data, and appears to be the result of customs tariffs and uncertainty surrounding the trade war. .
The shares were first sold at the report's release and then rose, as the market took the news as a sign that the Fed would lower interest rates. On the Treasury market, yields, which were already down sharply this week, fell again. The 2-year return closely mirrors the forecast of Fed policy. It fell to 1.77% after an intraday peak of 1.89%. The 10-year yield, which affects mortgage and other loans, reached 2.059%. Returns change the opposite price.
"I think the Fed has indicated that it is ready to lower rates, if the economy remains sluggish, if trade wars remain deadlocked," said Michael Arone, chief strategist of the company. Investment at State Street Global. Councilors. "I think today 's report will support the idea that the Fed will cut rates.I do not know if it will be in June, but I do not think we are too far away. from a Fed rate cut. "
After the employment report, federal fund futures rose, indicating market expectations regarding a quarter point cut from the Fed by July, from Half a percentage point in September and a third reduction in December, according to BMO.
"One would think that the market is gravitating around a reduction in July, a reduction in September and another in December." We lowered rates by 2.9, 25 basis points in 2019, "said Jon Strat, BMO rate strategist. This would represent a 0.75 percentage point reduction in the federal funds target range, which now ranges from 2.25% to 2.50%.
The market is now considering a 95% chance of a quarter point cut in July, Hill said. The Fed will meet on 18-19 June and 30-31 July.
"Market signals obviously require the Fed to cut rates … We do not think the Fed will cut spending at this point" [June] meeting, "said Tilley. I do not think the Fed has done enough to report it. On the sidelines, today 's ratio, especially with lower average hourly earnings, would prompt them to cut spending later this year. We believe that they will benefit from this meeting and the June press conference to convey this message. "
In addition to weak hirings in May, the government's report revised Friday job growth in March and April to 75,000 in total, bringing the three-month average to 151,000. Average hourly earnings increased 3, 1%, one tenth less than expected.
"What you have is the slowest growth we've had two years ago, and we think the impact of tariffs on the manufacturing sector is happening," said Tilley. , referring to the average of the last three months. Manufacturing has created only 3,000 jobs.
"The pricing situation has really changed our view of what could happen in the future," he said. "Our investment committee ended the overweight in US large cap stocks and emerging markets when trade talks broke down, and when you add the possibility of tariffs on imports from Mexico, those restrictions make us much more pessimistic and we expect even weaker growth and hiring. "
Mr Tilley said that this week's low ADP headcount report, showing only 27,000 jobs in May and a sharp slowdown in hiring small businesses, was very revealing as to the # 39, the impact of uncertainty on the economy. Hiring slowdowns typically start in small businesses.
"If businesses are worried about tariffs, and any slowdown, small employers would take faster action than those of more than 500 employers, who have long-term hiring plans," said Tilley. .
Arone said the market would struggle to move forward, even though the stock's initial reaction is that the bad news is good because they soften the Fed.
"There is currently a dilemma: economic data continues to indicate a slowdown … Investors fear that tariffs will exaggerate, but central bankers are pledging their support. what's going to be the most important going forward, "said Arone. "Is it an accommodative monetary policy that will save the situation or are we going to get a trade deal?" I would say that monetary policy alone is not enough. "We need better economic data. in order for the market to progress higher ".
Correction: This story was revised to correct the fact that the probability of a Fed rate change in July was 95%.
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