US: Jobs data leaves a Sept FOMC rate hike in the balance - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that they had argued for bringing forward the timing of the next Fed rate hike from December to September that all that was required was for the flow of economic data to be broadly consistent with an improving jobs market and growth remaining consistent with continued progress toward price stability.

Key Quotes

“The key test was always going to be last Friday’s jobs report and the data has, perhaps just about, kept September alive as a possibility for a rate increase. The DXY index advanced marginally on Friday but has today reversed that marginal gain while the 2-year UST bond yield is about unchanged. That says it all really with market participants no better enlightened over the timing of the next move from the Fed.

While key elements of Friday’s report were weaker than expected, taking the jobs data on a three-month or longer perspective is consistent with a jobs market that continues to improve. The NFP average year-to-date is now 182k while the 3-month average stands at 232k. The average earnings print was a little weaker but the annual rate is trending higher despite the slowdown in annual earnings growth from 2.7% to 2.4%. Year-to-date earnings are up 2.5% on average compared to 2.2% over the same period last year. Yes, hours worked dropped but all other data is pointing to a pick-up in real GDP growth suggesting productivity has improved. The key problem now hindering a rate increase in September is not the data as such but the fact that the financial markets remain well off pricing in a move. The Sept fed funds futures contract is indicating about a 25% probability of a move this month, roughly unchanged over the last few days. The jobs data was supposed to have been the key data that might have pushed the market to pricing a move.

That leaves communication from Fed officials as the only means for pushing the market toward pricing a move, if that’s what the FOMC wants to do. Fed presidents Williams, Lacker, George, Rosengren and Kaplan all speak this week and if the FOMC wish to act this month, we surely will need to hear some pretty explicit comments this week. San Francisco Fed President Williams speaks late Tuesday night early Wednesday and his comments may well be key in shaping market expectations this week. We believe the market remains very complacent to the risk of a September move and hence we could see increased speculation on a Fed hike over the coming weeks that helps to support the dollar.”