Strong wage growth is key takeaway from July's US jobs report. Throw in decent inflation next week and markets might start tentatively re-aligning with Fed dots
The US labour report shows payrolls rose 209,000 in July versus expectations of a 180k gain. The net revisions were up 2,000 so a very good outcome given the economic environment. Unemployment fell to 4.3% from 4.4%, as expected, while underemployment remained at 8.6%. There was also good news from wages. They rose 0.3%MoM – the strongest increase since February – which kept the annual rate of growth at 2.5%.
Average hourly earnings (YoY%)
This is a positive story, but one month of stronger wage growth is not going to sway the market in terms of its thinking for Fed policy. However, next week will see the release of the PPI and CPI reports and both look set to show an increase in inflation pressures. The market is currently looking for headline PPI to rise to 2.3% from 2% (core PPI to rise to 2.1% from 1.9%) while next Friday’s CPI report is predicted to rise to 1.8% from 1.6%.
This combination of stronger wage, producer and consumer price inflation could nudge the market into thinking that its pricing of only one rate rise over the next 18 months may be too cautious. With the activity backdrop looking reasonable and the economy adding jobs in significant numbers we are looking for a December Fed rate hike followed by two further moves next year.