We begin with Friday's rather dismal US payrolls report which to a large extent represents a latent effect of the US dollar rally over the past couple of years. On a relative basis, hiring Americans has become more expensive. An elevated level of uncertainty, driven in part by risks associated with the monetary policy as well as the presidential elections, has not helped.

Let's look at some trends in the labor markets.

1. The job market's weakness has now spread to the services sector.

Source: @BofAML

2. After a strong showing over a previous couple of months, US labor force participation has turned lower.

3. Even as the headline unemployment rate (U-3) declined to lows not seen since 2007, a broader measure of unemployment, which includes marginally attached workers plus those employed part-time for economic reasons (U-6), has stalled.

Below is the ratio of the headline jobless rate to the broad (U-6) unemployment over the past couple of decades. While fewer people are filing for unemployment benefits, the health of the broader labor market has significant room for improvement.

 4. Related to the above, here is part-time employment for "economic reasons".

5. US manufacturing jobs growth has worsened again on a year-over-year basis.

6. Wage growth is back below 2.5% (YoY). Unless the non-demographic component of labor force participation begins to climb again, it's difficult to see a significant jump in hourly earnings growth. It is worth pointing out, however, that given slow inflation, real wage growth in the US is reasonable relative to a number of other developed economies.

7. The next chart shows the average weekly hours worked by US employees on a year-over-year basis. Even with a positive hourly wage growth (above), declining hours could mean less cash in households' pockets.

8. For what it's worth, the headline unemployment rate is now below the 'Natural Rate of Unemployment". According to classical economic theory, inflation should begin to rise at this point. But given some of the labor market challenges shown above, price increases - outside the recent increase in energy and agricultural commodities - should remain benign.

Separately, the ISM Services PMI weakened in May. This provides more evidence that the soft patch in the US economy is not limited to manufacturing and energy.

The ISM Non-manufacturing Employment Index is consistent with Fridays's poor payrolls report (above).

Below is the ISM services sector new orders index. Is this consistent with the projected 2.5%-3.0% US GDP growth in Q2?

Despite the weakness discussed above, we have seen some positive indicators from the US. The ECRI index of leading indicators, for example, remains robust.

Source: @MarathonWealth, @businesscycle 

Also, the St. Louis Fed’s "price pressures" measure rose to the highest level in two years (albeit still depressed on a historical basis).

Source: @stlouisfed

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In response to the weak jobs report (and to some extent the ISM Non-manufacturing PMI) the June rate hike is off the table according to the futures market. The July contract rose above the pre-Fed-minutes levels - it was the Fed minutes that temporarily resurrected the chances of the Fed doing something in June.

Source: @barchart

Here is what Friday's economic reports did to the implied rate hike expectations in 2016.

Source: @SoberLook, @CMEGroup

Global markets reacted quite violently to the jobs report. Here are some notable market moves.

1. As expected, we had a large decline in treasury yields in response to the payrolls disappointment.

Source: Investing.com

Source: Investing.com

2. Bank shares fell sharply amid declining rate expectations.

Source: Ycharts.com

3. German 5yr government bond yield moved deeper into negative territory.

4. The US dollar dropped sharply. Note that while US equities sold off initially in response to the payrolls report, this dollar decline is quite positive for the stock market.

Source: @barchart

5. The euro jumped 2%, an unwelcome development for the ECB.

Source: @barchart

6. The kiwi dollar rose by over 2%.

Source: @barchart

7. And dollar-yen fell by over 2%.

Source: @barchart​

As an aside, speculative accounts further cut net long yen positions - just in time for the yen rally (dollar decline). 

A 2% jump in the yen adds to the BoJ's challenges in fighting deflation and hurts Japanese exporters. The Nikkei 225 futures fell sharply.

Source: @barchart​

8. The biggest currency move in emerging markets was the South African rand - dropping 

Source: @barchart​

Here is the Russian ruble, the Turkish lira, and the South African rand vs. the dollar - percent moves over the past month.

Source: @barchart​

Another currency that had quite a rally was the Korean won.

Source: @barchart​

9. Bitcoin rallied sharply as well. Did the cryptocurrency finally respond to an economic data release? The rally started some time before the jobs data release as the market remains rather uncorrelated with global markets.

10. Finally, gold saw an impressive rise of almost 3% amid softer US dollar and falling rate hike expectations.

Source: @barchart​

Since we are on the topic of gold, let's continue with the commodities markets.

1. Sugar futures shot up in response to dollar weakness.

Source: @barchart​

2. Lean hogs futures continue to rally as pork prices in China hit records.

Source: @barchart​

3. Wheat futures were up 2%, also in response to a weakening dollar.

Source: @barchart​

4. A Daily Shot reader offered an interesting explanation for the unprecedented rally in soy meal futures.

I have some insight on the soybean meal market.  Like most things commodities, it’s a bit convoluted, but if you’re interested, here’s a little about the underlying fundamentals:

Meal spreads are inverted (backwardated) while the basis is weak (cash weak relative to futures).  Usually, weak basis is associated with a carry (contango) market.  High-protein soybean meal is usually thought to be 48 percent protein, and it is, but it can trade down to 46.5 percent protein in the cash market.  Soybean meal futures specify 48 percent meal, but any load-outs of meal below 47.5 percent protein are subject to rejection.  The futures market is pricing the value of 47.5 – 48 percent protein meal because no soybean meal crusher would put out meal if he didn’t think he could make the 47.5 percent no-rejection level.  The 2015-16 soybean crop was large, but also very low protein.  Because of this, very high protein meal is in short supply, and the futures market inversion is an indication of short supplies of 47.5 or better meal.  However, at the same time, there is no shortage of lower protein meal.  Hence, the cash market appears weak relative to futures, but it’s really a comparison between apples (very high protein) and oranges (merely somewhat high protein) meal.  It’s rare to have this disparity, but as this year proves, certainly not impossible.

Fred

5. US oil rig count increased for the first time since March. As discussed before, at current prices some mothballed US crude oil production could come back online.

In the Eurozone, Italian services saw the first contraction in 17 months. The strengthening euro is not going to help.

Source: Tradingeconomics.com, Investing.com

Argentina's government said that May tax revenue rose 23%, a record. Green shoots?

Next, we have a few updates on the equity and credit markets.

1. Merrill Lynch uses sell-side research as a contrarian indicator, which suggests that US equities have room to rally further.

Source: BofAML

2. US HY market is still outperforming equities year-to-date. It was up on Friday while stocks declined on average.

Source: Ycharts.com

3. Below is a comparison of some of the largest equity market declines in recent history.

Source: @wef

Finally, we have a very interesting guest contribution from Sam DeRosa-Farag. This presentation is called "Credit’s Correlation with Equities - Do they have the same drivers?" It is part of a series that Sam plans to prepare for the Daily Shot.  

Credit as an Equity Proxy?

No, both have distinct drivers 

• Credit assets have become increasingly correlated with equities while becoming less correlated with rates over the last 25 years, implying similar drivers and risk factors may be driving the performance of both credit and equities. 
• Longer-term, all factors which drive the performance of financial assets are correlated with the economy and macro risks. However the significant leads and lags seen in the performance of different asset classes, including credit and equities, indicate the drivers of asset performance are distinct.  
• Historically, equity performance has been a function of earnings growth and valuations (P/E) while credit has been driven by expected default rates and an illiquidity premium.  
• A first assumption might be that a higher correlation of credit with equities implies that credit has become more economically sensitive i.e. faces higher default risk. However, the reality is default probabilities have declined significantly since 2000. 
• With the deleveraging of the financial system, liquidity premia have become the single most dominant risk in credit and not default probabilities. 
• Liquidity premia are a function of financial conditions, and, as a result, credit acts as a leading indicator. On average credit tends to lead equities by 14 months.  Defaults are a lagging indicator with a 12-18 month lag on average. 
• The liquidity premia component of spread is now double the component due to defaults, a significant shift since the 1980’s when defaults were the dominant risk.  

Source: Sam DeRosa-Farag 

Source: Sam DeRosa-Farag 

Source: Sam DeRosa-Farag 

Source: Sam DeRosa-Farag 

Source: Sam DeRosa-Farag 

Source: Sam DeRosa-Farag 

Turning to Food for Thought, we have 5 items this morning:

1. The deadliest jobs in the United States.

Source:  ‏‏@paul1kirby

2. Religiously unaffiliated Americans are a growing voice in the US political landscape.

Source: ‏‏@FactTank, @WSJPolitics

3. Do longer working hours mean lower productivity (at least in OECD nations)? 

Source: ‏@wef

4. Speaking of longer hours, how many minutes of work do you put in before getting to the office?

Source: ‏@wef

5. This topic remains controversial, but according to the Tax Foundation, a 20% corporate tax rate could significantly improve federal revenues down the road.

Source: @taxfoundation,  @scottahodge