Data during the week suggested that the labour market continues to improve gradually. Indeed, nonfarm payrolls rose by 175K in May, following a 149K increase the month before. As a result, average job growth during the past three months amounted to 155K. Looking at some of the details of the report, a net 8K jobs were shed in the manufacturing sector (was -9K), though the services sector added 179K jobs (was 172K). In the meantime, the sequesters led to the disappearance of 14K jobs at the federal government, though hiring by local governments limited total government job losses to just 3K. On a less positive note, the workweek held steady at 34.5 hours. Accordingly, the aggregate hours index, a good proxy for total labour activity, rose by just 0.1% in May, after a 0.1% drop the month before. As a result, the 3mo3m annualised growth rate slowed to 2.8% from 3.6% in March. Finally, the unemployment rate edged up a tenth to 7.6%, though this reflected a large inflow in the labour force and should therefore not be seen as labour market weakness.
Meanwhile, in line with developments in the labour market, the ISM non-manufacturing index rose to 53.7 (was 53.1), while its manufacturing counterpart fell to 49, down from 50.7 the month before, dipping below the boom-bust mark for the first time since November 2012. As a result, the composite index remained at 53.1 in May, a level that is roughly consistent with GDP growth of around 1.8%, but lower than the 2.4% growth recorded in Q1. That said, the first quarter flow of funds report continued to show that the economy is strengthening from a fundamental point of view. Indeed, households’ assets rose by almost USD 3 trillion to USD 83.7 trillion on the back of gains in house and equity prices. This significantly reduces the necessity of households to increase their savings to compensate for the rise in taxes in the beginning of the year. Indeed, we recently raised our GDP growth forecast for the US, partly because we had been expecting noticeable wealth gains.
US Treasury yields continued to rise during the week. In the beginning of the week there was not much movement in yields, but the weaker-than-expected ADP private employment report on Wednesday led investors to scale back expectations of when the Fed will start to reduce its asset purchases. Still, May’s official labour market report, with a 175K gain in jobs, eased concern that the labour market had lost momentum. As a result, 10-Y yields rebounded, ending the week at 2.18%, 5bp higher than the end of the previous week. Fed officials have signalled that they are willing to let their asset purchase programmes taper off when they see job growth in excess of 200K for three consecutive months. These conditions are likely to be met around the December meeting, which should prompt the Fed to announce a reduction of its asset purchases during that meeting (though a September move remains a possibility). Together with an improving economy, this explains why we expect 10-Y yields to rise to 2.5% at the end of the year.