Daily Market Update: US jobs growth a bit weaker than expected, but still consistent with a healthy labour market
Yesterday brought the latest batch of disappointing business survey results from the UK economy.
Friday’s US jobs report had a somewhat softer-than-expected tone to it. The headline payrolls figure printed at 160k in April, which was below the consensus expectation for a gain of 200k and the weakest month for employment creation since last September. There were also net downward revisions to the past couple of months to the tune of 19k, while the jobless rate held steady at 5% rather than decline to 4.9% as had been anticipated. One area which did surprise to the upside was wage growth, with annual hourly earnings picking up by more than expected to stand at 2.5% y/y in April, up from 2.3% in March. Meanwhile, average weekly hours worked registered the expected increase to 34.5 from 34.4 in March.
Overall we regard this as a mildly disappointing report but one that is not likely to significantly alter policy-makers’ views on the outlook. Pessimist analysts will point to the ca. 60k (allowing for revisions) shortfall in the payrolls outcome vs. expectations, but we caution, as always, against placing too much weight on a single month of data, especially in a series as volatile and prone to revisions as US payrolls is. It makes more sense, in our view, to focus on measures of trend, such as the three month average (a point, by the way, that applies equally to occasions on which the data surprise to the upside). On this measure, payrolls grew by an average of 200k in the three months to April. This is somewhat slower than the 225k registered on average over the past year and the cycle peak reading of 282k recorded in December. However, it is still a very healthy pace of jobs growth nonetheless and is solidly above standard estimates of trend monthly employment growth in the US, many of which are below 100k.
Furthermore, as the economy approaches full employment (and the fact that the jobless rate has been broadly steady at 5% for the past seven months suggests we are in that ballpark), we should not be surprised to see job growth slow. Moreover, given the proximity to full employment we should not be surprised to see signs of wages moving higher, as was evident in April. And that does indeed look to be happening on a trend basis too: year-to-date growth in hourly earnings is up over 2.4% y/y this year, up from 2.3% in 2015 and 2.1% in 2013. There is certainly nothing here for policy makers to get alarmed about in terms of any dramatic escalation of wage costs, but a gradual move higher nonetheless, and one which is consistent with gradually building inflation pressures, and an associated need to gradually withdraw from the high level of monetary policy accommodation that is currently in place in the US.
To be clear, Friday’s report on its own is certainly not likely to trigger a fresh wave of hawkishness at this stage from Fed Chair Yellen and other key officials at the Fed who will have another jobs report and a further five weeks of other data to consider when they next decide on policy on June 15th. Indeed, at the margin, the softer tone to the April employment figures probably raises the bar slightly for a June hike at what is still a highly cautious Fed. However, if the incoming news continues to paint a picture of an improving jobs market amid indications of a stronger GDP growth performance (as we broadly anticipate), then markets are in our view likely to have to revisit their expectations for Fed policy in the months and quarters ahead.
Such pricing currently anticipates a mere two thirds of a single hike this year – pricing which remains at odds with the latest Fed guidance for two hikes by the end of the year. Indeed, we find weekend comments from key policy maker Bill Dudley of the New York Fed both interesting and significant in this respect. Commenting after the jobs report, Dudley opined – very much in line with our own thinking above – that the report was “a touch softer, maybe, that what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook”, adding that it remained a “reasonable expectation” that the Fed would increase rates twice this year. Ultimately, it is the incoming data that will determine whether Dudley’s reasonable expectation (one which we share) gets fulfilled, which means investors, analysts and policy makers alike need to remain focused on tracking how growth, the jobs market and inflation outlook evolve.
Friday’s jobs data point clearly wasn’t decisive in the US rate debate, but single data points never are, no matter how unsatisfactory that might be to Mr. Market. So while we remain constructive on the outlook for the US economy and the dollar (looking for a move back to perhaps a $1.07-$1.10 range in Eur/USD) we will need to see validation of that story in the incoming news on activity, jobs and prices. In the meantime, Eur/USD is just a touch higher than where it was early on Friday, opening just below $1.14 this morning. However, the greenback has advanced by more against a generally out-of-favour pound as Brexit risks continue to weigh on sterling, with GBP/USD opening below $1.44, about 0.6% down on Friday morning levels. That combination sees Eur/GBP trading at 79.15p as the European session kicks off.