US: Pace of jobs growth has lost some of its punch - BBH

It's jobs day for the United States  and since at least the Great Financial Crisis, it is the single most important report for the US, but barring a significant surprise, the pace of job growth has lost some of its punch, suggests the research team at BBH.

Key Quotes

“The 12-month moving average of non-farm payrolls peaked in 2015.  The slowing since has been gradual.  The zenith was about 282k.  It stood at 176k in January.  However, there has been a recent acceleration and the four-month average is 212k.  in February 2017, the US created 200k jobs and the expectation is for about the same this year.”

“Investors appreciate that the job growth remains strong.  However, the issue now is about the pace of Fed tightening, and this hinges in part on wage pressure.  In broad terms, Fed officials accept that headline inflation converges to core inflation (not the other way around) and that wages drive core inflation.”

“Even if there are some temporal challenges with it, there still seems to be the conviction that businesses eventually pass rising costs on to their customers--which is the essence of the Phillips Curve.  The Beige Book compiled for the upcoming FOMC meeting did in fact report that many districts are experiencing tight labor markets and wage pressures.”

“Anecdotes are one thing (and that is what the Beige Book is), while data is another.  That is what the average hourly earnings are about.  This is where the most attention will be paid, ceteris paribus.  Here this is some risk of disappointment.  The rise in January average hourly earnings to 2.9% y/y, the highest since 2009, fanned ideas that inflation was here and the Fed would become more aggressive.”

“However, there seemed to have been some distortions that may have exaggerated the increase.  In the second leg of his testimony last week, Fed Chair Powell seemed to suggest that there was no significant wage acceleration underway.  Given the base effect, average hourly earnings need to rise by 0.3%, or the y/y rate will slow.”

“Over the last six, 12, and 24 months, the y/y pace has been steady at 2.6%.  Just like the durable goods and factory orders did not seem to have been immediately bolstered by the capex associated with the tax cuts, it may be difficult to ferret out the bonuses and pay increases that made the headlines earlier this year.”

“In any event, the market has come to nearly fully discount a third hike this year, which is what the median Fed forecast in December indicated.  Assuming the average effective Fed funds rate rises 75 bp this year on the back of three hikes, fair value for the January 2019 Fed funds futures contract is 2.17%.  It settled at 2.155% yesterday.”