US labour market is firing on all cylinders - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that the US non-farm payrolls surged 255K in July while June was revised up to 292K, arguing strongly that the US labour market is firing on all cylinders.

Key Quotes

“That is, unless one looked at the extraordinarily generous seasonal adjustments that were used. From a conventional point of view it certainly seems strange that such strength in job creation sits alongside average earnings growth of just 2.6% y-o-y. True, the m-o-m increase in July was a tick higher than expected at 0.3%, and 2.6% is the fastest pace we’ve seen since December 2015 – the last time there was a brief expectation that “this time wages are really going to rise.”

Certainly, the market took the number the mean that a Fed hike this year might be back on the cards. The Fed Funds futures contract implied a 46.7% chance of a 25bp hike by year-end post-payrolls vs. 37.3% before and 71.7% vs. 52%, respectively, by end-2017. At the same time, the USD index jumped from 95.6 to 96.5 before retracing some gains, with EUR down from 1.1160 to 1.1085 this morning and JPY from 101.34 to 102.90 – therefore the happiness at the ECB and BoJ.

Indeed, the payrolls report makes things more awkward for the Fed. Their professed (or genuine) optimism on the US outlook is again being met in a key data series; they have flagged their willingness to raise rates on that basis; ‘So why not actually just do it?’, the market may ask. Indeed, why not start in September?

Of course, the idea of the Fed raising rates before a US election where populists are already so popular seems highly improbable. Moreover, we have the lesson from December 2015 in terms of what happened to most markets after the Fed raised rates and signalled more to come. Yet not hiking rates when the jobs data are ostensibly so strong would mark another crack in the battered hull of the Fed’s credibility. As a wise man once said, success can test one's mettle as surely as the strongest adversary.”