June 4, 2017 – May’s employment data softened with payroll growth totaling 138,000 jobs compared to the consensus forecast of 182,000. Downward revisions to March and April data brought the total “miss” to 110,000 fewer jobs than expected. The unemployment rate continued to fall, to 4.3%, from 4.4% in April, largely due to a drop in the labor force participation rate. Average hourly earnings increased by 0.2% in May from a month earlier or 2.5% on an annualized basis, the same annual rate they have been stuck near since late 2015. That is weak from a historical perspective. When the unemployment rate was 4.4% in May 2007, wages for nonmanagerial workers were growing better than 4% annually. In May 2001, those wages were up 4% from a year earlier. Despite the soft numbers, this report is probably not alarming enough to prevent the Fed from hiking interest rates at its upcoming meeting on June 14. The low unemployment rate and the near record number of job openings still point to a labor market that is tight and getting tighter. The lack of strong underlying wage pressure will reassure the Fed that its slow pace of rate increases remains appropriate.
Equity markets reached another all time high while interest rates fell in reaction to the news this week. After three straight days of flat trading, the 10 year US Treasury yield fell immediately following the employment report and closed the week at 2.16%, a seven month low. A continued lack of wage pressure, even as the unemployment rate hits new cycle lows, has also contributed to the decline in yields. Markets fully expect the Fed to raise interest rates at its upcoming meeting next week but after that, no more hikes are expected until 2018. Until there are further signs of wage pressure and/or inflation, despite a robust labor market, interest rates appear to remain low. Low interest rates and tight credit spreads will continue to benefit Alternative Lenders as they seek the lowest cost of capital to fund their businesses.
In funding news this week, U.K.based lender, Zopa, raised a £32 million financing round led by Wadhawan Global Capital and VC fund Northzone. The funding is meant to support the launch of their “next generation” bank. CommonBond priced $232 million of securities in their first securitization of 2017 on Friday. After $1.75 billion of deals were priced in May, June could be an active month as issuers take advantage of the strong demand for paper and the low rate and spread environment. Finally, IMN is hosting their Global ABS conference in Barcelona this coming week with attendance expected to high.
Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.
Sources: Orchard Platform, TIAA-CREF, Bureau of Labor Statistics