James Smith, Economist at ING, suggests that above-consensus wage growth and non-farm payrolls may prompt some to rethink the possibility of a near-term rate hike – although we need to see more optimal financial conditions before the FOMC signals its next move
Key Quotes
“After a couple of mixed US labour reports, today’s data was fairly encouraging. Wage growth provided a pleasant surprise to markets, coming in at 0.3% MoM vs 0.2% expectations and taking the year-on-year change up to 2.3%. Based on other wage indicators, the previous month’s reading of 2.2% looked low compared to the trend in other datasets (more like 2.5%). With that in mind, there is the potential for some more encouraging wage growth figures over the next few months, as pent-up demand in the labour market starts to translate into more rapid pay rises.
The rest of the report was fairly in line with expectations – Non-farm payrolls came in a touch above consensus at 215k, roughly around what we believe to be the current underlying trend (around 200k). The unemployment rate ticked back up to 5%, in line with our forecast, although not because of a correction in the household survey measure of employment.
By this measure, almost 1.9 million jobs have been created in the past 4 months, which in our view is a bit improbable (when compared to the payroll-based measure) and is due a correction. If it does trend lower for a couple of months, this could temporarily keep the unemployment rate at or above 5% – ultimately though, this is just statistical noise. What matters the most here is that wage number.
FX Reaction
The combination of a positive surprise in wage growth and headline payrolls could prove to be the much needed pick me up for a hung-over dollar (and at the very least, will serve to stem any further pain). As we have previously noted, the Fed’s latest reaction function can be summarised into three broad categories: (i) US data; (ii) US financial conditions and (iii) market expectations of Fed tightening.
Taking note of the Fed’s “trifecta” can help when forming USD forecasts. As a simple rule of thumb: good data + easy financial conditions + low market expectations = window for USD strength. Today’s decent US labour market report means that we are now close to entering this window.
Yet, while robust domestic data will be hard to ignore, we suspect that the Fed will wait for more optimal financial conditions before choosing to signal its next move. As for EUR/USD, in line with our broad 1.05-1.15 range trade strategy, today’s robust US data means that we are inclined to fade any move higher and think that a near-term retrace towards the middle of this range is likely should Fed talk turn gradually more hawkish (in line with US data outcomes).”
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