Investing.com – The June employment report released on Friday showed a mixed picture for the U.S. labor market, but lacked data to sway the Federal Reserve (Fed) for its current plan to continue with a gradual removal of policy accommodation.
The report showed strong job creation with 222,000 non-farm payrolls (NFP) last month, beating expectations of just 179,000, along with a further positive upward revision to May’s numbers.
The jobless rate unexpectedly increased to 4.4%, from the prior 4.3%, when analysts had expected no change.
In another negative surprise, average hourly earnings failed to rise an estimated 0.3% from the prior month, clocking in at just 0.2% and leaving the annualized wage inflation steady at 2.5%, compared to the 2.6% consensus forecast.
Economists at ING believe that the disappointing wage inflation is the key take away.
“It doesn't help the Fed’s quest to convince markets that the dip in inflation is ‘transitory’”, they explained.
Still, the report overall gives evidence that the real economy is in “good health”, according to Capital Economics.
They said that “it is only a matter of time before the tightness in the labor market translates into rising wage pressures.”
“Our view is that, despite the lack of a pick-up in wage growth and core inflation, the Fed will nevertheless push ahead with hiking interest rates,” they said.
“Strong jobs growth should eventually translate into higher wages, but it is taking time to do so,” ING agreed.
“The Fed remains confident it will come, suggesting gradual hikes will continue, but the market continues to have doubts,” these experts concluded.
The Fed has embarked on gradual policy tightening as it begins to be concerned that its accommodative policy could begin to have a negative impact on the economy.
As part of that normalization process, it already hiked rates twice this year and projected that there would be one further increase in 2017.
The central bank further announced a plan to wind down asset purchases, reducing its $4.5 trillion balance sheet.
Markets have been skeptical about another rate increase in 2017 with the odds hovering around the 50% threshold.
Despite a slight decrease in the odds immediately after the jobs report was released, Fed fund futures have returned to putting the chances at 49%, according to Investing.com's Fed Rate Monitor Tool.
Though the U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, pared gains following the data but has since returned to levels seen just prior to the release.
The lack of movement in both Fed fund futures and the greenback suggest that Friday’s jobs report has definitely not been a game changer.
Markets will have the chance to gauge the Fed’s recent impressions with the publication of its semiannual monetary policy report to Congress at 11:00AM ET (15:00GMT) Friday.
The next major clue to policy changes will likely come when Fed chair Janet Yellen testifies to the Congress with her own outlook on Wednesday.