(Reuters) - U.S. job growth slowed sharply in May and wages rose less than expected, suggesting the loss of momentum in economic activity was spreading to the labor market, which could increase calls for the Federal Reserve to cut interest rates this year.

KEY POINTS:

* U.S. May nonfarm payrolls rose 75,000 vs forecast for 185,000 and April’s downwardly revised 224,000 (prev +263,000)

* U.S. May labor force participation rate 62.8 pct vs April’s unchanged 62.8 pct

* U.S. May jobless rate 3.6 pct, as expected, vs April’s unchanged 3.6 pct

* U.S. May average hourly earnings all private workers rose 0.2 pct, below consensus for +0.3 pct

* May year-on-year earnings +3.1 pct, below consensus for +3.2 pct and April’s +3.2 pct

* U.S. May U-6 underemployment rate 7.1 pct vs April 7.3 pct

MARKET REACTION:

STOCKS: The S&P 500 was up 0.8% in morning trade

BONDS: Treasury yields fall after the report. 2- year at 1.8030% and 10-year at 2.0671%

FOREX: The dollar index was down 0.4%

COMMENTS:

CANDICE BANGSUND, ASSET ALLOCATION MANAGER, FIERA CAPITAL, MONTREAL

“There was a lot of nervousness going into the report this morning. It’s obvious that hiring lost some momentum in May. Businesses are likely taking a more cautious approach when it comes to hiring and investment intentions, just waiting for further news on the trade front before pushing forward with hiring and investment plans. The economy is still strong, weakness largely is tied to uncertainly pertaining to the trade tensions between the U.S. and China, and obviously now Mexico.

“Sentiment is a little bit more cautious, but if you look at the non-manufacturing side of the economy, which represents two-thirds of the U.S. economy, things are still quite optimistic and firmly in expansion mode. So this tells us the trade headwinds are not going to spill over more broadly outside of the factory sectors and the economy will be able to withstand some uncertainly in the factory space.”

MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ, NEWPORT BEACH, CALIF

“This weaker-than-expected jobs report, and notably so, will fuel concerns about what has been an impressively solid U.S. economy to date. This would also be a development that would increase the general headwinds facing the global economy. The case for an interest rate ‘insurance cut’ this summer is building to a point that makes it hard for the Fed to resist.”

MARK GRANT, CHIEF GLOBAL STRATEGIST, B. RILEY FBR INC, FT LAUDERDALE, FLORIDA

“The headline number is shocking and the real number is worse than the headline number because the real number was zero for the month. That shocked the markets. Average hourly earnings also missed the forecast with just 0.2% gain.”

“I think what the market is rallying on is that now there is a general expectation that the Fed is going to become market friendly and the odds are 80% between now and September the Fed is going to cut interest rates.”

“It’s a positive for the bond markets. For the equity markets, it’s saying we’re having problems in the economy, trade war with China, effects from tax cuts are beginning to wear off, which is why the bond market is thinking that the Fed will cut rates now, which would be a big positive not only for corporate debt borrowings but obviously borrowing costs for the United States would be much lower.”

SAMEER SAMANA, SENIOR GLOBAL MARKET STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE, ST. LOUIS

“Like the ADP number on Wednesday, the payrolls data was weaker than expected, with revisions to the previous two months also negative.

“The unemployment rate and underemployment rates ticked lower, but the downshift in the participation rate makes that less significant.

“Wages also decelerated and will give the Fed food for thought ahead of upcoming policy meetings as they consider whether to remain patient or cut interest rates.

“Stocks, yields, and the U.S. dollar fell, while gold rose. We still think a recession is not in the cards over the coming twelve months and investors should ensure their portfolios are in-line with desired long-term strategic allocations.”

RUSSELL PRICE, CHIEF ECONOMIST, AMERIPRISE FINANCIAL SERVICES, TROY, MICHIGAN

“It was clearly a weak report that suggests that particularly with the revisions to April and March, it shows the U.S. economy is seeing a negative contribution from the trade dispute. Also it suggests we’re likely running out of available workers that are on the sidelines. So the pace of job growth is likely to continue to slow in the months and quarters ahead.”

“More worrying is the fact that the market really hasn’t responded to the further escalation of trade risks not so much with the United States and Mexico which is likely to go way but with the United States and China. That does look like it’s going to continue to escalate and looks like it’s going to continue to be around for a lot longer.”

“If you look at the sectors not specifically trade related they did pretty good, better than I expected. Construction added some workers and things like education and health held up reasonably well but that was down from the previous pace.”

“Retailers lost another 8,000 jobs in May. Trade is part of that situation. The trend of losing since February shows that retailers are looking to cut costs where they can.”

“The weakness in the jobs report shows the U.S. economy is not immune to the trade war. Today’s report certainly supports the case for the Fed to cut interest rates sooner rather than later. It shows both that the pace of economic growth may be slowing and yet serious wage inflation pressure seem to remain elusive.”

“The market is looking past the report and focusing on the increased likelihood of the return of the Fed put.”

GREG ANDERSON, GLOBAL HEAD OF FX STRATEGY, BMO CAPITAL MARKETS, NEW YORK

“It’s a soft report. It’s a soft enough report that probably a June rate cut should be on the table for discussion.”

“Unlike a lot of the reports we’ve seen where the headline is strong and the details are soft, or vice versa, this is just soft. Headline is soft, details are soft.”

“Average duration of a spell of unemployment rose pretty substantially to 24.1 weeks from 22.9. The employed share of the population also fell.”

“The exchange rate that has had the most consistent correlation with U.S. yields is dollar/yen. It has had the biggest reaction at a little over half a percent, though the euro is also close to that. It is warranted because the probability of a rate cut in June just jumped.”

ELLIS PHIFER, MARKET STRATEGIST, RAYMOND JAMES, MEMPHIS, TENNESSEE

“This number fell in line with the ADP, which felt like an aberration. So everybody figured the non-farm payrolls number would be weak, but not this weak. These numbers and the uncertainty of the trade situation are putting pressure on the Fed to ease. I think expectations right now are showing the Fed could ease in July, but there are discussions that there could be easing in June. The economy on its own merits, without the trade uncertainty wouldn’t necessarily mean that the Fed would ease right away. But given the uncertainty we’re facing, I think the Fed is more likely than not to go earlier than expected. So June for a Fed cut is a possibility.”

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

“This number is just going to feed the narrative of the Fed imminently cutting rates. We think that’s still incredibly premature. This “disappointing” job gains number comes on the heels of printing 225,000 the previous month. I don’t know that anyone genuinely believes that this is an economy that is consistently printing 225,000 jobs, that’s not where we are. This is an economy that’s printing closer to 150,000 jobs on a consistent basis and lo and behold that happens to be the average of the last two months. I think it’s incumbent of people not to get caught up in the noise of what are noisy data. We need to take a bigger picture view on this and understand that over the last two months we are averaging at 150,000, the number that we would define as the number we are supposed to be printing at this stage of the cycle.”

JJ KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO

“Pretty disappointing overall. I guess that those that really, really want an interest rate cut are happy. But think about the reason why you are happy – you are happy because less people are employed. I don’t quite understand that perverse logic. But it would certainly make the case the Fed would have to look at cutting rates.”

“We continue to see the stalwarts of the report every month, that being business-to-business services and healthcare, continue to show growth. Looking for a silver lining on some of this, the fact that manufacturing is unchanged, basically, is a good thing in terms of those who are really concerned about tariffs. And I don’t think it is a huge surprise given the scramble that is going on in retail right now that they lost some jobs.”

“I don’t think it is a surprise we had an adjustment to last month’s employment report because it was such a blowout but we’ve had pretty significant adjustments over the last two months – 75,000 less jobs than we thought.”

“It’s bad news that is causing this, and you see bonds immediately take off on it.”

DOUG DUNCAN, CHIEF ECONOMIST, FANNIE MAE, WASHINGTON

“This is a weaker number with the economy slowing. The employers are getting risk averse. Last month’s downward revisions are that big so that’s not a significant weakness. The jobless rate is about the same as last month so there’s nothing structural going on. The risk aversion stems from trade and a general global slowdown. The year-over-year gain in wages is decent with the increase in productivity. This report is not going to be enough for the Fed to change course right now . Residential construction increased so that’s good for housing supply.”