US NFP: Federal Reserve likely to continue tightening on strong jobs report - Danske Bank

According to analysts from Danske Bank, the combination of lower unemployment and better wage data supports the Federal Reserve case for announcing 'quantitative tightening' (shrinking the balance sheet) in September and raising rates again in December,

Key Quotes: 

“In terms of employment growth, we have now had two strong reports in a row, as employment rose by 209,000 in July and June was revised up to 231,000. Some of the strength in recent months is likely catch-up from the weakness earlier this year, as US growth seems stable slightly above trend growth.”

“As employment has risen for 82 consecutive months and the labour market recovery is expected to continue, focus was on the unemployment rate and wage growth, as these are more important for the Fed’s decision whether to continue tightening monetary policy or not. The unemployment rate fell from 4.4% to 4.3%, while wage growth was unchanged at 2.5% against expectations of a fall to 2.4%.”

“The reason the Fed continues hiking is Janet Yellen and co’s strong belief in the Phillips curve. The tight labour market should be sufficient to push wage growth and inflation higher eventually. In our view, the problem is that the tightness of the labour market is not the only factor determining wage growth, as second-round effects following many years with low inflation have hit wage growth. When employees expect inflation to remain low, they can live with low wage growth, as real wage growth may still be solid, making it less likely inflation will reach the target.”