US payrolls top forecasts but wage growth disappoints
We expect the Federal Reserve to refrain from raising rates until June as wage growth remains subdued.
The pace of US jobs growth quickened in January with non-farm payrolls rising 227,000 compared with expectations of a 175,000 gain. The gains were led by education and health and the construction sector.
Wage growth remains soft
Despite the stronger-than-expected increase in payrolls the overall tone of the report was on the soft side. For example, the unemployment rate ticked up to 4.8% and wage growth disappointed with an increase of only 0.1% month-on-month, taking the year-on-year rate to 2.5% versus expectations of 2.8%.
So there is little sign that the recent strength in the US economy is feeding through into higher wage growth. This reinforces the message from earlier in the week when the broader employment cost index came in at 2.2% year-on-year.
The combination of better-than-expected activity and subdued wage growth was a theme when the Bank of England met this week, with the central bank revising up its estimate of trend growth and effectively cutting its assumption for equilibrium unemployment. The Federal Reserve (Fed) may be considering a similar move.
No rate hike expected until June
Our assumption remains that the US central bank refrains from tightening until June when they are expected to raise the Fed funds target rate by 25 basis points. The pace of tightening is not expected to pick up until the end of the year and into 2018 when fiscal policy begins to impact on activity.