What the May jobs report mean for the Federal Reserve

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down the May jobs report with Manulife Investment Management Global Chief Economist and Head of Macro Strategy Frances Donald and Hercules Investments CEO James McDonald.

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ALEXIS CHRISTOFOROUS: Let's get back to our guests now-- Frances Donald, Global Chief Economist and Head of Macro Strategy at Manulife Investment Management, and James McDonald, CEO of Hercules Investment. James, I'm going to put this one to you. You just heard what Brian Cheung had to say about the Fed.

Do we run the risk here, though, of the Fed prematurely pulling back on stimulus just as things are starting to get back up and running, because something we haven't talked about this morning is all the looting and what that has done to the economy as we try to get back on track. A lot of businesses that were just opening or about to open now need to shutter again because of the looting, and that is not reflected in this latest jobs report.

JAMES MCDONALD: Yeah, I think there are a few major drivers here that are going to impact all of these scenarios. Don't forget, it's a presidential election year. That's a really big deal in terms of how things are manipulated by the government. Also, this is an historic, unprecedented event. You know, the Fed took really drastic measures to avoid a crisis, maybe more so than was necessary. We now have this data.

And we have to revise what we didn't know to what we expected. The congressional budget office projected that GDP was going to fall at a 30% annual rate in the second quarter before rising 22% annualized in the third quarter, with an economy snap back at that point. If the snapback has happened sooner, the projections for unemployment rates to drop will have to be revised also. And so they had an initial estimate from 15.8% to 11.5%.

Since we're there, if they bring that down a little bit more, we're going to see the peak of the recovery right when the presidential campaign hits its climax. And so there's going to be some of the best economic data we've ever seen in the history of this country right around the time of the election. And so I'm looking at how these different moves work on the calendar in terms of the presidential election.

And I'm also looking at how we take what we thought was going to happen, and then adjust it to what is happening. And so this is a week-by-week, month-by-month basis. When we had the first prints from the impact of the virus, the numbers were far worse than anyone projected. Now, they're far better than what we thought. And so the truth is that we don't know what to expect. And that excludes the whole risk on the ground with the protests and the risks on the ground with the furthering spread of the virus.

We still don't have a handle on the pathology of this bug, I'll call it. And so there's so many unknowns. All we can do is continue to try to adjust our expectations. I'm going to stay in the contrarian seat. I don't understand how we get a market that's worth more when it's making less, and fewer people are participating.

So I'm going to continue to price press that trade with the puts on this market. And I'm going to be paying very close attention to the election as a major factor in how governance is carried out. And although we expect and want independence from the Fed and the White House, I just think there's going to be more alignment than we've ever seen in the past.

BRIAN SOZZI: Frances, in 15 seconds, how would you describe the state of the US economy after one of the worst pandemics this country has ever seen?

FRANCES DONALD: Very fragile. You're going to see the best economic data you've ever seen, as James said. But keep your eye on the fourth quarter. Just because we put people back to work does not mean that they felt safe, or comfortable, or that they didn't suffer setbacks financially. We have a long way out. We are not through the worst of it just yet. We will still see a lot of challenges.