June's strong jobs report dashes some recession fears, but it is not a strong enough catalyst to get the Fed moving yet on hiking interest rates.
A surprising 287,000 jobs were created in June, more than 100,000 above forecasts. The number was viewed as payback for a stunningly weak May report, which was revised even lower — from 38,000 to 11,000.
Stocks surged and Treasury yields moved higher. The dollar reversed earlier losses. Treasury yields in the 10-year and 30-year durations initially rose, but they later fell as buyers influenced by low global yields continued to move into the long end. Market expectations for a Fed rate hike this year increased. Fed funds futures implied a still-low 24 percent chance of a hike for December, but that was up from 12 percent Thursday, according to Jefferies.
"It's still not enough to move the needle for the Fed," said Tom Simons, money market economist at Jefferies. "They'll want to see a couple more months of these and a couple months of calm in financial markets."
The unemployment rate rose by 0.2 to 4.9 percent, but Simons pointed out the rise paralleled a slight improvement in the participation rate to 62.7 percent, indicating the workers listed themselves as unemployed. "Job openings are at their highest level in 15 years, so they'll probably get a job quickly," he said.
Slow job growth was one reason the Fed cited for not hiking rates at its June meeting, along with concerns about the potential economic and financial impact of the U.K. referendum on leaving the European Union. The bounceback in June hiring was seen as a sign that the labor market is strong enough but the hiring pace is not expected to be sustainable.
"I think the Fed will remain on hold. This is just one number. The three-month average remains around 140,000," said Michael Arone, chief investment strategist at State Street Global Advisors. "Net revisions for April and May were down a little bit. Combine that with Brexit and the (U.S.) election, this keeps the Fed on hold. Just (with) some of the broader market uncertainties out there, I think the Fed is going to be reluctant to raise rates in that environment, despite what is a strong June employment number.
Citigroup economists said the jobs number increases the likelihood of a rate hike this year but not until later. "...but the Fed likely will remain in 'wait-and-see' mode, particularly since this is a pre-Brexit number," they wrote in a note.
Economists said the weather was a factor, as the seasonal hospitality and leisure industry added nearly 60,000 jobs following little change the month earlier. Health care and social assistance added 58,000. Nearly another 30,000 workers came back to work in the information industry, representing the striking Verizon workers that were a negative in the May report.
"This would indicate the U.S. is not headed for recession or slowdown in the economy … the U.S. economy, despite Brexit and other things, continues to chug along," said Arone.
Rob Martin, senior U.S. economist at Barclays, agrees the report reduces the odds of a recession. The chances of recession in the next 12 months rose to about 30 percent following May's weak report, but it now has dropped to 20 to 25 percent, he said.
"With that trend, it lowers the probability of recession, but it's likely the chair of the Fed will want to see another number or two to be sure," he said.
But J.P. Morgan economists Friday said their model shows a 37 percent chance of recession in the next 12 months. The probability increased after June auto sales fell by 5 percent.
Goldman Sachs economists had expected 210,000 payrolls for June, and were among the more optimistic ahead of the report. They blamed the weather for a soft patch in hiring in the spring.
The Goldman economists noted that during April and May, industries most affected by weather barely hired. Construction, leisure and hospitality and retail, added just 4,000 jobs compared to 113,000 in October through March. Construction hiring was again low in June.
"Some of this is payback for the weather. I think 287,000 overstates the strength. Net-net, it's a downward revision of six thousand. That revision even further confirms April and May data were the echo of a very warm winter," said John Canally, economist and strategist at LPL Financial
Canally said there have been five job scares since 2010, and each time there was a rebound.
"That's what happened this time. Scare averted, but I do think you're in downshift mode," he said. Canally said job gains averaged 175,000 in the past six months, but it had been 200,000 prior to that. By the end of the year, he expects the pace to slow to just 150,000. Economists expect a slowdown in the hiring pace, based just on the economy moving toward full employment and a lack of qualified candidates for the jobs that are available.
The fear had been that the weak April and May reports signaled a recession. Those worries dissipated on Friday.
"The downshift is underway based on history. But it has to go from 200,000 to 50,000 per month to indicate recession, so we're a long way from that," Canally said.