Rebound in June not enough to compensate for April and May
After two very weak jobs reports for April and May, the June jobs report showed a strong rebound as employment grew 287,000 in June after it only grew 11,000 in May . The employment growth in June was pushed up as the Verizon strike ended. As we mentioned in our flash comment after the May jobs report, one should not rule out that the weak jobs reports for April and May were due to volatility. We had a similar situation in autumn last year when the August and September reports were weak but the October report came out really strong.
The fact that employment growth can fluctuate from 11,000 in May to 287,000 in June shows that one should not put too much weight on one report and that the jobs reports are volatile . Despite the rebound in June, the monthly increase in nonfarm payrolls has averaged slightly below 150,000 over the past three months, which is still the lowest since 2014. In other words, the strong June report is not enough to compensate for the two weak reports in April and May.
One should not over-interpret the rise in the unemployment rate from 4.7% in May to 4.9% as it was due to a higher participation rate not falling employment . The reason the unemployment rate fell from 5.0% in April to 4.7% in May was due to a shrinking labour force so it was widely expected that some of this would be reversed in the June jobs report. The participation rate rose from 62.6% to 62.7%. Average hourly earnings disappointed slightly as they only rose 0.1% m/m in June, which was lower than expected and lower than the recent trend . Wage inflation is now at 2.6%.
Despite the rebound in June, we do not expect the Fed to hike this year. As we mentioned in FOMC minutes: Fed to 'wait and see' for even longer due to Brexit , 6 July 2016, the Fed needs data from after Brexit to analyse the impact of Brexit on the economic situation in the US before moving on . We think the US economy is not immune to a slowdown in Europe. Due to Brexit, we have lowered our growth forecasts for the US economy from 1.9% to 1.7% this year and from 2.3% to 1.9% next year. Hence, we also expect the Fed to be on hold until June 2017 and only to raise rates twice next year (we expect the following rise in December 2017). As we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely. We think the risk to our Fed view is balanced, so the next hike could come sooner if the impact of Brexit on the economy is smaller than we currently expect (or later if bigger). The Fed can afford to stay patient as PCE core inflation is still below 2%, inflation expectations (both survey-based and market-based) have fallen and wage inflation is still subdued. For more details, see Research - Global growth revised down following Brexit, 28 June 2016.
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