Is the jobs report likely to derail the Fed?
Well, not according to what we’re seeing in the curve where the front-end is lagging and not according to Citi either, who is out with a post-mortem on this morning’s rather dismal data.
Here’s the bank’s take on the below-consensus y/y AHE print and what it means for realized inflation and the Fed’s decision calculus…
Weaker than expected wage growth will inspire confidence in neither investors nor Fed policymakers that low unemployment is leading to near-term inflationary pressure. Still, the below consensus wage growth print was in line with our expectations and does not change our call for two further rate hikes this year or our medium term outlook for inflation. With real activity on a more solid footing following the Q1 “soft patch” and unemployment at low levels, we do not find the deceleration in job growth concerning, and Fed officials will likely take a similar view.
We would emphasize that the weak average hourly earnings print is largely a function of poor month-to-month day-count adjustment. Based on these considerations, we currently expect wages to rise 0.3% in June with upside risks and the year-on-year reading may pop to 2.7%. If the data play out this way, the softness in May is likely to be of little import when the FOMC meets in September.
We would push back against the view that softer payrolls alongside downward revisions are a negative signal for the real activity, as 1) payrolls can be volatile and softer recent prints follow strong weather-boosted early 2017 gains, 2) the six-month trend in job growth at 160K is well above the normal level we would expect this close to full employment.
The unemployment rate is now below most (admittedly highly uncertain) estimates of the natural rate of unemployment. The low level makes it more likely FOMC participants revise their estimates of the natural rate (currently median of 4.7%) lower at the June meeting. Still, declining unemployment and underemployment rates should increase policymaker confidence that nominal wages will ultimately push higher.
Earlier this week, Fed Governors Powell and Brainard indicated they are closely watching inflation, but even relatively dovish Brainard found it “premature” to change her base case for rate hikes. We do not expect these opinions to change following the wage growth print, especially since the Fed’s preferred measure of compensation, the ECI, picked up strongly in Q1. A June hike remains likely with a further hike in September still highly dependent on realized core month-on-month PCE inflation.