US: Rebound in payrolls to keep Fed on tightening path - ING

James Knightley, Senior Economist at ING, explains that healthy jobs growth has returned for the US and unemployment has fallen again, offering support to the Federal Reserve's policy of gradually raising rates.

Key Quotes

“The April US jobs report has non-farm payrolls rising 211,000 versus the 190,000 consensus. There were 6,000 downward revisions to the past couple of months, but this is still much better than 79,000 outcome last month. There was also good news in the form of the unemployment rate surprisingly dropping to 4.4% from 4.5% (It was 4.8% just three months ago). Underemployment also fell sharply (8.6% versus 8.9% previously) to its lowest since late 2007, suggesting more and more people are switching from part to full time work.”

“The one disappointment was the fact annual wage growth slipped to 2.5% from 2.6% despite the MoM increase matching the 0.3% consensus forecast. The fact that we are still quite a way away from 3%+ wage growth means that there is no real pressure on the Fed to accelerate the pace of interest rate hikes.”

“Nonetheless, the rebound in employment offers support to the Fed’s assertion from earlier in the week that the slowdown in activity seen in the first quarter is “transitory”. This would suggest the FOMC members’ forecasts that they will hike rates by 25bp on two, possibly three more occasions this year, still holds. The markets remain a little more cautious, pricing in around 40bp of tightening while our official forecast is for just one 25bp hike.”

“However, this data is not helpful for our call and we will need to see activity numbers continue to disappoint and inflation to come in softer (which is possible given commodity prices). It is also likely that we will need to see President Trump’s tax and spending polices failing to make headway for the Fed to re-evaluate the prospective path of interest rates.”