The Fed has another excuse to hold off on a September rate hike. Fed on hold in September as US non-farm payrolls disappoint. Although Chair Yellen said that the case for a rate hike has strengthened in recent months at the Jackson Hole Symposium, she indicated that the decision will be heavily data dependent. A string of worse-than-expected data since that announcement – ISM manufacturing, non-farm payrolls and auto-sales – gives the Fed reason to maintain their dovish stance for now.
While the Fed realises that it can’t hang too much on single data points, the central bank is very cautious about undoing the hard work in getting the US economy into a sustainable recovery that will support jobs growth.
We still believe that the Fed will raise rates this year, but that is more likely in December than in September now. The market’s expectation for a rate increase this month also fell on the release of the payrolls data (see chart). While headline CPI inflation remains low at 0.8%, core inflation at 2.2% is around the Fed’s target level. With lower energy and food prices from a year ago being transitory, the headline rate is likely to catch up to core soon. We believe that there are enough inflationary pressures for the Fed to act this year.
There were only 151,000 jobs added in August compared to a consensus estimate of 180,000. Hourly earnings only rose 0.1% mom, against a consensus of 0.2%. The unemployment rate remained flat at 4.9% while the market expected a drop to 4.8%. The numbers were affected by statistical quirks that are not fully remedied by the adjustments applied by the Bureau of Labor Statistics. Namely there was an extra working day this August compared to last August and the survey took place before the 15th of the month (which often leads to companies that pay employees on the 15th to incorrectly miss people off the payroll when filling in the survey). The weak wage data can therefore be discounted due to the quirks. Unemployment failed to decline as a result of higher labour market participation. The latter we view as a positive sign of economic strength. We believe that the September payrolls report will reverse the weakness from August. However, there are only three more payroll reports to be released before December and so we will need to see a strengthening in the data soon if the Fed is to act this year.
Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).