Strong US hiring catches economists off guard
The rate cut debate was thrown a curveball on Friday after the latest US jobs report exceeded even the most optimistic forecasts.
Hiring accelerated sharply in June from the previous month. The net 224,000 jobs added bettered the 217,000 jobs expected by Parsec Financial Management that was the highest forecast included in a Thomson Reuters poll of 105 economists. At the other end of the spectrum, economists were looking for as few as 89,000 new jobs, based on an outlook from Spartan Capital Securities.
After taking an overly glum view in June, economists gave the resilient labour market its due. The stronger-than-expected increase in jobs appears at odds with concerns of a coming recession, they said. It also has thrown cold water on Wall Street’s expectations for a large-scale rate cut at the Federal Reserve’s next meeting in late July.
The jobs report “would seem to make a mockery of market expectations that the Fed will cut interest rates by up to 50bp late this month”, according to Andrew Hunter, senior US economist at Capital Economics.
“Employment growth is still trending gradually lower but, with the stock market setting new records and trade talks with China back on (for now at least), the data support our view that Fed officials are marginally more likely to wait until September before loosening policy.”
On average, economists polled by Thomson Reuters expected the US economy to add 160,000 new jobs in June — the most bearish pre-report estimate since September 2017.
The labour market proved to be more resilient after a lacklustre May, when the US gained just 72,000 jobs. The report also showed steady wage growth of 3.1 per cent year-over-year, and an increase in labour force participation contributed to a higher unemployment rate of 3.7 per cent, up from 3.6 per cent.
Bob Baur, chief global economist at Principal Global Investors, noted that while US manufacturing gauges “have been in a lull”, consumers and the labour market remain confident:
With May’s disappointing report behind us, those who have been watching for indications of a near-term economic slowdown should take note that neither job nor wage growth have slowed to a point of concern yet. We can liken conditions to early 2016, when the consensus was that we were heading into a recession, but didn’t. […]
For those forecasting for the Fed, extending the expansion is still a good reason for a rate cut as long as inflation is low. It’s also important to note that they will take the necessary steps to avoid a significant disappointment to the markets. As positive as markets are currently, anything but a rate cut would be just that.
Investors have been looking for Fed officials to cut the central bank’s benchmark rate by half a percentage point at the end of this month. After the blockbuster June jobs report, the odds of such a rate cut have sunk from 29.2 per cent to zero since Wednesday, according to CME Group’s FedWatch Tool, which tracks federal funds futures. The market has now placed 95.6 per cent odds of a smaller cut, at 25 basis points, with a slight 4.4 per cent chance that the US central bank will hold firm.
“While the FOMC is not likely to overly fixate on a single month’s data from the jobs market, the fact that an alarming May report in terms of payroll growth was followed by a solid rebound in June does take some of the urgency away in terms of the decision of whether or not to cut the Fed funds target on July 31,” said Joshua Shapiro, chief US economist at MFR.
Oliver Blackbourn, a portfolio manager on Janus Henderson’s multiasset team, said:
If the US labour market and, by extension, the US consumer remain in reasonable health, recession risks may start to look overpriced. We have been through this a couple of times in this cycle already and each time the US consumer, which forms the backbone of the economy, has held up. That is not to take away from the increasing fragility, more apparent as global monetary stimulus has been removed, but it is by no means certain that the current slowdown will be enough to tip the US into recession.