US: Weak employment report from any perspective - Rabobank

Last Friday’s US Employment Report was weak from any perspective, according to analysts at Rabobank as Nonfarm payroll growth slowed down to 156K in August, while there were downward revisions for July (to 189K from 209K) and June (to 210K from 231K).

Key Quotes

“The unemployment rate rose to 4.4% from 4.3%. Average hourly earnings growth remained unchanged at 2.5% year-on-year, well below the 3-4% that the Fed prefers. If we take into account that the PCE deflator released a day earlier remained at 1.4% in July and the core measure fell to 1.4% from 1.5%, the recent data confirm that the Fed’s inflation outlook is too optimistic. In fact, inflation is moving away from the Fed’s 2% target instead of moving toward it.”

“What is the urgency of a third hike after the Fed has already hiked twice this year? Note that the Fed also intends to announce a start to normalizing the balance sheet at the September meeting. So monetary policy will tighten further this year even without a third rate hike. More importantly, the data increasingly question the validity of the Phillips curve framework that is the basis for the Fed’s hurry to hike rates. According to this theory the decline in labor market slack should accelerate wage growth and inflation.”

“Since monetary policy works with lags, the Fed therefore wants to hike before it actually sees higher inflation. However, if the theory does not work, it may be better to wait for evidence that inflation is indeed heading toward target. The minutes of the July meeting revealed that a major inflation debate is raging in the FOMC and some participants are asking the same questions. Our expectation remains that the incoming inflation data will continue to disappoint the FOMC and delay the next hike until next year.”