US: Labour market suggests growing support for higher rates – Commerzbank

Dr Christoph Balz, Research Analyst at Commerzbank, suggests that the US employment report for July, due out next week, should support the Fed’s stance of leaning cautiously towards higher rates.

Key Quotes

“The same applies to the purchasing managers’ indices, which will likely hold at above-average levels despite a slight decline.

US employment report releases have caused much turmoil in recent months: Few new jobs were created in May, but in June payroll gains came in at 285k, the highest since last October. Conversely, the unemployment rate first slipped by three-tenths to a post-crisis low of 4.7%, only to surge by two-tenths last month. At the end of the day, the underlying trend should be found between these extremes. Indicators such as the declining number of initial jobless claims have signalled that the labour market recovery continues (see chart 7). Also, the Conference Board survey showed that consumers viewed the labour market somewhat more positively than before.

We therefore expect payroll gains of 190k for July (consensus: 178k) and a one-tenth decline in the unemployment rate to 4.8% (consensus: 4.8%). As for average hourly wages, we expect an above-average increase by 0.3% on the month (consensus: 0.2%), though like the modest increase in June this would be due to calendar effects. The year-on-year rate would thus remain at 2.6%, but with the trend still pointing slightly upwards (chart 8). All in all, the data would therefore provide further evidence supporting the view that the weak May report was an outlier. This would underpin the Fed’s case for remaining on track for higher interest rates despite the Brexit decision. Unlike the market, we expect to see the next rate hike later this year.

The purchasing managers’ indices should also signal that the economic recovery continues in Q3. After the surprisingly large increase in June both the manufacturing PMI (forecast: 53.0, down from 53.2) and the services PMI (forecast: 56.3, down from 56.5) should come in slightly lower in July. But this would mean that both indicators remain at above-average levels.”