The market may have given up on a September rate hike, as odds plunged from 36% to 22% after today’s payrolls report, with even December looking suddenly shaky…
… but according to Goldman, the jobs report was nonetheless strong enough to justify a September rate hike.
As Jan Hatzius wrote moments ago, employment growth was weaker than expected in August, but more importantly above the Fed’s estimates of the breakeven rate. As a result, Goldman now sees a 55% probability of a hike at the September FOMC meeting, likely with dovish changes to the statement and dot plot. However even with the September rate hike, the Fed would be one and done for 2016, as Goldman now sees December odds tumbling from 40% to 25%, leaving the cumulative odds for just one rate hike in 2016 at 80%.
Goldman’s full thoughts:
- Growth in nonfarm payrolls was weaker than consensus estimates at +151k, but above the pace Fed officials typically consider sufficient to hold the unemployment rate steady over time—the so called “breakeven rate”. We therefore see this report as just enough for a large majority of officials to support a September rate increase. We have therefore raised our subjective odds of a hike this month to 55% from 40%. We also lowered our subjective odds for December to 25% from 40%, leaving the cumulative odds of at least one hike this year at 80%. Given the moderately soft payroll report and weaker than expected ISM survey yesterday, a rate increase this month would likely be accompanied by dovish language changes in the statement and downward revisions to the “dots” in the Summary of Economic Projections.
- Despite the softer than anticipated headline payroll growth figures, most private payroll categories showed job growth. The payrolls diffusion index—which represents the percent of industries with rising employment—edged down to 58.0% from 62.4%. Most of the slowdown in the August figures was concentrated in professional and business services (to +22k from +80k), leisure and hospitality (to +29k from +45k), and government (to +25k from +50k). The below consensus August payrolls figure is in line with historical precedent for disappointing August payroll figures, only for the bulk of these misses to be revised up in subsequent months.
- The household survey reported a 97k increase in employment in August. The unemployment rate remained unchanged at 4.9% (4.92% unrounded), as the labor force participation rate remained unchanged at 62.8%. The U6 underemployment rate was unchanged at 9.7% as a decline in the number of marginally attached workers was offset by an increase in the number of involuntary part-time workers.
- Average hourly earnings rose 0.1% in August (vs. +0.2% consensus) and were up 2.4% on a year-on-year basis, below an upward revised 2.7% increase in July. Nevertheless, the softer than anticipated average hourly earnings figure likely reflects calendar quirks, rather than fundamental news about wage growth. Average weekly hours edged down to 34.3.
- 5. With payrolls, unemployment claims, consumer sentiment, vehicle sales, and a number of business surveys in hand, our preliminary read for the August Current Activity Indicator is +1.2%, down from +2.3% in July. Despite the decline, the three-month moving average edged up to 1.8% from 1.7% in July.
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