“After the upside surprise in the June payrolls – which saw net new job creation of 224k against 160k consensus expectations – expectations of a 50bp rate cut by the Fed this month have all but unwound; 27bp in cuts are now priced in by OIS forwards for the July FOMC, down from as much as 38bp two weeks ago,” notes Bill Diviney, ABN AMRO Senior Economist.
“The market still very much expects a 25bp cut, however – and with good reason, in our view. Momentum in the economy continues to weaken amid significant uncertainty over trade policy, and inflationary pressure can best be described as muted, with risks of a de-anchoring in expectations.”
Against this backdrop, arguably the most interesting news from the June payrolls report was the continued surprise weakness in wage growth. Since the start of the year, hourly earnings growth has disappointed in 4 of 6 payrolls reports, while momentum in wage growth has fallen sharply – from a cyclical peak of 3.6% 3m/3m annualised last October, to 2.7% in June. This is helping to drive unit labour cost growth close to zero, thanks to a rise in productivity growth, and comes despite a further fall in the unemployment rate, from an average of 3.9% in Q1 to 3.6% in Q2.”
“While it is hard to pinpoint a driver of softening wage growth, what we can say is that it suggests the ‘natural’ rate of unemployment (NAIRU) is lower – potentially much lower – than conventional estimates of 4.6% (CBO) and 4.2% (FOMC median). As a result, there is likely further room for the unemployment rate to fall, without significant inflationary pressure. This is something we argued in our Where is the wage growth? report last year, and it bolsters the case for Fed easing.”
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