NFP: Solid job gains, subdued wage growth- Danske Bank

According to analysts from Danske Bank, FOMC members will welcome the NFP report but they are concerned about the subdued wage growth, as it partly reflects lower inflation expectations. They still expect no rate hike in June. 

Key Quotes: 

"The US jobs report for April showed solid jobs growth of 211,000, which was above both our and consensus expectations. Jobs growth was still primarily driven by services but both construction and manufacturing employment rose marginally. As employment growth continues to outpace labour force growth, the labour markets continue to tighten, which is also clear when looking at the unemployment rate. The unemployment rate fell to 4.4% from 4.5% (against
expectation of an increase to 4.6%) and is now at the lowest level in a decade.”

“The U6 unemployment rate (a broader unemployment measure including discouraged workers and parttime workers looking for full-time employment) fell to 8.6% from 8.9% and is now at the lowest level since November 2007 – this is quite important as this is the Fed’s favourite slack indicator.”

“While the FOMC members will welcome the solid jobs growth and the lower unemployment rates, as it supports their view that monetary policy should be tightened gradually, we think the FOMC members are concerned about the subdued wage growth, as it partly reflects lower inflation expectations. Thus (against consensus) we think a June Fed hike is a bit too soon and guess July is more likely. Also, if the Fed hikes in June, it would indicate a hiking pace of four hikes per year (every other meeting), which is more than the Fed projected both in December and March (3 hikes per year).”

“The reason why we think the Fed will still hike relatively soon is that it puts more weight on labour market data than inflation rates. We expect the Fed to lower its current NAIRU estimate of 4.7% in the updated projections in connection with the June meeting, which could justify the Fed in keeping its target range unchanged at the meeting.”