Soft US jobs data unlikely to derail June hike

US employment data released on Friday was weaker than expected, with 138k new jobs added last month against a forecast of 182k, casting doubt on the likelihood of a third rate hike this year taking place in September. The probability of a June Fed hike remains unchanged, however, but looking beyond June, the markets will need to see evidence that US economic growth is continuing from Q2 into Q3.  To some extent the market reaction on Friday looks a little exaggerated to us as the US economy is close to full employment and cannot be assumed to generate strong payroll rises every month. Also the unemployment rate still fell to 4.3% and other measures of the labour market have also held up relatively well of late, including a 253k surge in the ADP survey. Should these trends continue, it seems likely that wage growth will eventually catch-up, giving the Fed enough grounds to maintain their policy of steady normalization. While the market may have moved to expect a December rate move over a September one, we would still not rule out that a September hike could still happen.  

Services PMI data for Japan and China improved in May.  The Caixin services PMI rose to 52.8 in May from 51.5 in April, easing some concerns about growth in China, following weaker than expected manufacturing PMI data released last Thursday.  Japan’s services PMI rose to 53.4 in May from 52.6.  While there is a fair amount of economic data due to be released over the coming days, the market’s main focus is likely to be on political events this week, with the UK’s general election and former FBI director Comey’s testimony to the Senate Intelligence Committee both scheduled for Thursday.  

In the GCC, Bloomberg reports that Saudi Arabia, UAE, Bahrain and Egypt have cut diplomatic ties with Qatar and closed their borders with the country, as tension over Qatar’s perceived support of terrorist groups in the region has escalated.       

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