The Non Farm Payrolls disappointed with a weak headline number, negative revisions and mostly painfully no monthly change in wages. This puts the y/y change at only 2% after the breakout we had last time. With no wage inflation, there is no real rise in core inflation which the Fed cares about.
Nevertheless, and assuming no disaster in Europe, this is unlikely to derail the first rate hike, only postpone the second one. Here are 5 points to consider:
- Gathering around September: Fed officials began talking more and more about a hike in September. After having made these preparations, they could always return to being “data dependent” and postpone it. However, they seem on track.
- Gradual moves: Alongside the message of raising rates, we have also heard the Fed will do it gradually, and markets are beginning to believe this. Yellen is believed to be one of the members that sees only one hike in 2015. A move in September and a wait until January or March could well fit the gradual nature of the process.
- A one-off: As the weak March NFP was a one-off regarding job gains, the Fed could easily dismiss the fall in wages as a one off.
- Other indicators are positive: The Atlanta figures have shown a y/y gain of 3.3% in April and in May. While we don’t have the June data, these numbers are good. Also the Employment Cost Index and Labor Costs are quite upbeat.
- Uncomfortable with low rates: We are in zero interest rates for ages and some just think it will stay like this forever. With the Fed already blamed for the previous bubble, they would like to shy away from a new one.
What do you think?