ETF Securities Research Blog

The FED needs to look closely at the payroll report

The markets seem confused over the jobs report on Friday, lets hope that Janet Yellen isn’t.

On the face of it the figures look pretty strong, a 242k non-farm addition to the payroll was well above expectations with strong rises across most sectors, plus positive revisions to last month too. But there appears to be some weakness in hourly earnings which fell 0.1% against expectations of +0.2%. This is the likely reason as to why the US dollar and gold have swung round so much in the last few trading days, with two distinct camps interpreting the jobs report in quite different ways.

The latest wage growth figures puts annual wage growth at 2.2%, below the 2.5% figure seen last month but in all likelihood there is probably no loss of momentum in wage growth. Occasionally the 15th of the month, a payday for people paid semi-monthly, falls after the Bureau of Labor Statistics survey and so payments are consequently under-reported. Pantheon Macroeconomics has done some interesting work on this calendar quirk and estimate that the true rate of growth is probably closer to 2.6%.

It would be a shock to markets if the FED hikes rates on the 16th March, with FED futures indicating the probability of a rate hike at only 8%, and 46% for June. A rate hike this month would therefore be construed as a policy error by the markets and would likely exacerbate already volatile markets. That in itself may discourage the FED from hiking so we may see an adjustment to the dot-plot instead of a rate hike. In the longer-term, the longer the FED leaves it before the second hike, the greater future wage pressures will be, increasing the risks of a policy error.