Today’s labour market report was strong across the board. Employment outside agriculture – non-farm payrolls – increased by 288k people in June, and the April and May numbers were revised up by a total of 29k, leaving the total increase in the number of employed above 300k (288k+29k). Consensus expectations was for a more modest 210k increase (Nordea: 225k).
Moreover, the unemployment rate dropped to 6.1% in June from 6.3% in May, and against consensus expectations of an unchanged reading of 6.3% (Nordea: 6.2%).
The one thing that was not as strong, or stronger than, we had expected, was average hourly earnings, which did not pick up pace, but remained at 0.2% m/m June, unchanged from May, and in line with consensus expectations (Nordea: 0.3%). We still believe that wage growth will pick up during the year and prompt a re-pricing of the Fed.
Implications for Fed policy
The solid jobs report reinforces our expectation that the Fed will remain on QE tapering autopilot and thus we still expect QE to end in Q4 2014. At the June FOMC meeting, the Fed indicated that a rate hike is still not imminent, reaffirming its plan to keep the fed funds rate low “for a considerable time” after the end of QE.
In our view, the Fed’s current guidance is simply unsustainable if the economy evolves in line with the Fed’s projections. Thus, adjusting for the additional stimulus of the Fed’s balance sheet, the 2.50% median FOMC forecast for the fed funds rate by end-2016 is equivalent to a near 0% interest rate policy – at full employment!
Nordea