2 Jul 2015
Nonfarm payrolls requires a continued gain of 200K+ to enable a Fed rate hike in 2015 – DB
FXStreet (Barcelona) - Previewing the US labour data to be released ahead in the day, Economists at Deutsche Bank explain that only a 200K+ continued gain in the nonfarm payrolls will shift the stance of the dovish Fed to raise rates later this year.
Key Quotes
“We have written numerous times that as long as jobless claims remain under 300k—they have been hovering close to a 42-year low—and employee tax withholding receipts are robust—they have been consistently growing at a 5%- plus year-over-year rate—trend employment will stay above 200k. Therefore, if June payrolls were to disappoint for some reason, possibly because of an unusual seasonal factor or distortion associated with the end of the school year and the start of the summer vacation, it should be heavily discounted.”
Watch the NonFarm Payrolls Live Coverage with Valeria Bednarik and Dale Pinkert
“Arguably, the behavior of the unemployment rate may be more important than payrolls, especially if average hourly earnings surprise to the upside. This is because we believe the former will decline to 5.3%, which would be the lowest reading since April 2008 (5.0%) and would match the FOMC’s yearend target. However, this is a necessary, but not sufficient, criterion for interest rate tightening later this year. As we wrote last week, the relationship between the unemployment rate and inflationary wage trends has varied over time. That is why the trend in average hourly earnings is important, as well.”
“Consider the following three business cycles: 1982 to 1990, 1991 to 2000 and 2001 to 2007. During the 1980s expansion, average hourly earnings growth surpassed 3%—the minimum rate the Fed believes is necessary to push underlying inflation back toward 2%—when the unemployment rate was 5.5%. The pattern was the same in the long 1990s cycle, as the 3% ceiling was breached once the unemployment rate fell to 5.5%. Importantly, it was not until the unemployment rate fell to 5.0% in the last business cycle that the growth rate of average hourly earnings surpassed 3%.”
“At present, the broadest measure of average hourly earnings is expanding at only a 2.3% year-over-year rate, and our 0.2% June forecast for earnings implies the 12-month growth rate remains steady. For a dovish-leaning Fed to have the confidence to raise interest rates later this year, we need to see continued nonfarm payroll gains of 200k-plus, along with a further tightening in the labor market that produces more noticeable upward pressure on wages.”
“Moreover, there likely needs to be some sort of resolution of the situation in Greece, because Fed policymakers would be hesitant to raise rates if the financial markets were concerned about Greek contagion.”
Key Quotes
“We have written numerous times that as long as jobless claims remain under 300k—they have been hovering close to a 42-year low—and employee tax withholding receipts are robust—they have been consistently growing at a 5%- plus year-over-year rate—trend employment will stay above 200k. Therefore, if June payrolls were to disappoint for some reason, possibly because of an unusual seasonal factor or distortion associated with the end of the school year and the start of the summer vacation, it should be heavily discounted.”
Watch the NonFarm Payrolls Live Coverage with Valeria Bednarik and Dale Pinkert
“Arguably, the behavior of the unemployment rate may be more important than payrolls, especially if average hourly earnings surprise to the upside. This is because we believe the former will decline to 5.3%, which would be the lowest reading since April 2008 (5.0%) and would match the FOMC’s yearend target. However, this is a necessary, but not sufficient, criterion for interest rate tightening later this year. As we wrote last week, the relationship between the unemployment rate and inflationary wage trends has varied over time. That is why the trend in average hourly earnings is important, as well.”
“Consider the following three business cycles: 1982 to 1990, 1991 to 2000 and 2001 to 2007. During the 1980s expansion, average hourly earnings growth surpassed 3%—the minimum rate the Fed believes is necessary to push underlying inflation back toward 2%—when the unemployment rate was 5.5%. The pattern was the same in the long 1990s cycle, as the 3% ceiling was breached once the unemployment rate fell to 5.5%. Importantly, it was not until the unemployment rate fell to 5.0% in the last business cycle that the growth rate of average hourly earnings surpassed 3%.”
“At present, the broadest measure of average hourly earnings is expanding at only a 2.3% year-over-year rate, and our 0.2% June forecast for earnings implies the 12-month growth rate remains steady. For a dovish-leaning Fed to have the confidence to raise interest rates later this year, we need to see continued nonfarm payroll gains of 200k-plus, along with a further tightening in the labor market that produces more noticeable upward pressure on wages.”
“Moreover, there likely needs to be some sort of resolution of the situation in Greece, because Fed policymakers would be hesitant to raise rates if the financial markets were concerned about Greek contagion.”