US Labour Report casts serious doubt over near-term hike - ING

James Smith, Economist at ING, suggests that over recent weeks, the blocks appeared to have been gradually falling into place for another rate hike from the Fed, but the latest labour report has potentially put a large spanner in the works.

Key Quotes

“Non-farm payrolls fell well short of expectations, coming in at just 38k, with downward revisions to the previous two months of 59k. Even despite the known Verizon strike, which took 35k workers out of the employment data this month, the jobs shortfall appeared to relatively broad-based.

The other parts of the labour report were less dramatic. The unemployment rate declined by two notches to 4.7%, owing to a fairly significant drop in the household measure of unemployment. Wages held steady at 2.5% YoY as expected, which although is higher than a few months ago, it is not yet consistent with tight labour market conditions exerting upward pressure on pay.

Overall, FOMC members could look at this report in one of two ways. The more optimistic explanation is that job creation is slowing as the economy reaches something close to full employment and erodes the last remaining slack. Alternatively, one could see it as evidence that weakness emanating from business investment side of the economy since the start of the year is starting to filter through to the more lagging labour market.

Although FOMC members will want to avoid interpreting one month’s figure (particularly as non-voter Evans said earlier, the strike means it is harder to analyse), the downward revisions to earlier readings will mean that, at the very least, the more dovish FOMC members will want to see further evidence before making any conclusions.

In our opinion, this may well put the final nail in the coffin for a June hike, with confirmation of this potentially coming from Chair Yellen's speech on Monday (16:30 GMT).

Putting this payrolls figure aside for a moment, we have noted recently that a June hike potentially looked unlikely purely because the FOMC will be keen to wait until the “known unknown” of the UK EU referendum has passed (which could potentially impact upon US financial conditions).

In effect, the question facing the FOMC in June will be “would delaying a hike until July/September be mistake?”. Given the Fed’s long-held preference for a gradual pace of normalisation, we think that the answer is probably “no” (as emphasised by recent Fed comments and the latest set of minutes), especially now that many Fed members will want to see the next one or two labour reports before seeing if a July/September hike is a viable option.”