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US jobs jump to ease pressure on Fed

The most important US jobs report of 2019 so far exceeded expectations and may reassure the Federal Reserve about the state of the US economy.



Janet Mui
Global Economist, Cazenove Capital

The most influential US employment report of the year to date was released today (5 July) and it could significantly influence what the Federal Reserve (Fed) does about interest rates at its meeting this month.

The non-farm payroll report for June showed outsized gains in employment, with 224,000 jobs added. The report excludes farm workers (which is why it’s called the non-farm payrolls), private household employees, and employees of non-profit organisations.

The number was well in excess of the 160,000 that was predicted and suggests that the hugely disappointing report in May (72,000) could be just a one-off.

It will reassure the Fed that the US labour market remains in good shape and no urgent or aggressive monetary easing (rate cuts) is needed at this point.

That said, the report is not perfect – the unemployment rate actually ticked up and wage growth disappointed.

As a result, the Federal Open Market Committee (FOMC), which sets rates, may still view an “insurance” cut of 25 basis points (or 0.25%) as justified just in case the economy deteriorates. This is because of prolonged trade tensions and pockets of weakness in the economy, for example in manufacturing.

Despite the trade truce between the US and China, the ongoing uncertainty could lead to less hiring or even lay-offs in affected industries. It is a close call whether the Fed will act in July to cut interest rates or wait until September, with the upcoming inflation and GDP release likely to be influential too.

Perhaps the only certainty is that some sell-side analysts’ expectation of a 50 basis point (0.50%) cut is off the table.

It is encouraging to see that the previous weakness in goods-producing and construction industries were reversed in June. That said, the further slowing of the ISM Manufacturing Purchasing Managers' Index (PMI) and a number of other surveys point to slower hiring ahead.

Wage growth remained at +3.1% year-on-year, compared to expectation of a slight pickup to +3.2%, suggesting the tightening labour market (i.e. when there are fewer job vacancies available) failed to push up wages. The unemployment rate surprisingly rose from the 49-year low of 3.6% to 3.7% in June as labour participation picked up from 62.8% to 62.9%.

The strong jobs report failed to meaningfully alter the market’s expectation of Fed policy. Markets continue to fully price in one rate cut at the July meeting and nearly three rate cuts by the end of 2019.

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Janet Mui
Global Economist, Cazenove Capital


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