"Eye-popping" May US payrolls jump may set back Fed ease

(Reuters) -U.S. job growth accelerated far more than expected in May, keeping the Federal Reserve on track to hold off starting to cut interest rates.

The Labor Department said on Friday that the unemployment rate ticked up to 4.0% for the first time since January 2022, while nonfarm payrolls increased by 272,000 jobs last month, much more than the 185,000 forecast by economists polled by Reuters. Revisions showed 15,000 fewer jobs created in March and April combined than previously reported.

MARKET REACTION:

STOCKS: S&P 500 e-mini futures turned 0.29% lower, pointing to a soft open on Wall StreetBONDS: The U.S. Treasury 10-year yield jumped and was last at 4.414%; Two-year yields surged to 4.855%FOREX: The dollar index turned 0.61% higher, while the euro turned 0.62% lower

COMMENTS:

PADHRAIC GARVEY, REGIONAL HEAD OF RESEARCH, AMERICAS, ING, NEW YORK

“It's really quite difficult for the Fed to be anywhere near a rate cut…We see the odd weak reading in terms of activity, but then we come to the big numbers like payrolls and okay, the unemployment rate rose, I get that, it's up to 4%, but that's not high.”

“There's no urgency for the Fed to cut if the labor market is firm…we got a whole lot of stuff pointing to future weakness in the labor markets, but the reality is this is the most important employment print that we get. We just had it, it's bang up to date, and it's pretty strong.”

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA

"The report suggests continued resiliency in the labor market despite the rise in the unemployment rate... The market responded immediately with the Treasury yield inching higher and the equity futures market pulling back.

The Fed may see these numbers as an obstacle for cutting rates in September because what a strong labor market leads to is a stronger consumer, a consumer that can continue to spend and fuel inflation."

BRIAN NICK, SENIOR INVESTMENT STRATEGIST, THE MACRO INSTITUTE, NEW YORK

"It's the type of report that's not going to cause the Fed to want to change the course that it has been on, which is to describe the need for higher interest rates and the potential for strong job creation to keep upward pressure on inflation. But they're not going to like the fact that the unemployment rate went up to 4%. That's their year-end forecast and here we are with the May report that it's already there."

"The fact that you have these two numbers (payrolls and unemployment rate), are saying such different things, makes it very hard for investors and even harder for central bankers to know exactly what's going on."

"It is likely that we still get three interest rate cuts, because if the Fed is cutting in September because the unemployment rate is at 4.2% or 4.3%, then they're probably going to start having to cut at every meeting."

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NORTH CAROLINA (emailed note)

"The headline unemployment number is likely to get a lot of attention because it now has a 4-handle, but the greater-than-expected number of jobs created is the more important datapoint, in our opinion.

"To those who are worried about inflation – especially the Federal Reserve – the report should raise concerns that wage pressure and sticky inflation is more likely to persist than be transitory.

"We believe that the Fed is on hold at least until the election and may very well skip rate cuts for the entire year (our base case is still one 25 bps rate cut in December)."

EUGENIO ALEMAN, CHIEF ECONOMIST, RAYMOND JAMES, FLORIDA

"(The NFP) were surprising on the upside, but the unemployment numbers narrate a different view; there are discrepancies between the two. We will have to wait and see what the next couple of months look like because the Fed is not going to relent to lowering interest rates with such a strong labor market."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

“So much for slowing. The headline payrolls number is eye popping. The details? A little less so. There’s a chasm between the payrolls number being up 272,000 and the household survey’s employment number being down 408,000. There was also an outsized jump in the number of people working part time for non-economic reasons. It’s easy to poo-poo the strong headline number by saying it’s mostly driven by the non-cyclical health care and government segments, but the aggregate weekly payrolls gains across industries is pretty strong.

"The Fed will take this to mean that they can still focus squarely on inflation without worry much about growth.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“This is a hot number, and of course the part that is most interested to the Fed is the hourly wages, which rose more than expected on a year-to-year basis to over 4%.”

“But this is a strong report, and it suggests that there are no signs of any cracks in the labor market.”

“It’s a plus for economy and a plus for corporate earnings but it’s a negative in terms of the prospects of a rate cut perhaps as early as September.”

“This report probably erases the hope of a September rate cut and pushes it back to maybe December.”

“We have CPI next week and this is only one report but the fact that hourly wages went up on a year-to-year basis that is not good news for the Fed.”

(Compiled by the Global Finance & Markets Breaking News team)