US Payrolls provides another positive surprise - ING

James Knightley, Senior Economist at ING, suggests that the strong jobs growth in the US for the second consecutive month boosts the case for an earlier rate rise, but political uncertainty, mixed data and external risks still lead us to favour a 1Q17 hike.

Key Quotes

“The US labour report for July is strong, showing a 255,000 increase in payrolls versus the consensus forecast of 180k. There were net 18k upward revisions to the June and May figures too with the June figure now reported as a 292,000 gain. There were no employment falls in any of the sector breakdown, highlighting the healthy nature of the US jobs market right now.

Unemployment remained at 4.9% versus the 4.8% rate that was expected, but wages rose more than anticipated (0.3%MoM versus 0.2% consensus), labour participation increased and the average weekly hours worked rose to 34.5.

Consequently, the outcome of today’s report is supportive of the view that we could see a rate hike before year-end - we have had a couple of Fed officials this week suggest that this is possible. It also backs up the assessment within the latest FOMC statement that “near-term risks to the economic outlook have diminished”. Nonetheless, we have our doubts it will happen given the mixed nature of the US data flow and political uncertainty relating to the election, while external risks remain a possible constraint.

Additionally, with the RBA in Australia and the Bank of England providing more monetary stimulus and Japan boosting its fiscal stimulus we think a majority of Fed officials will be nervous about raising rates given the significant boost it could give the dollar. Instead, we think they will continue to tread cautiously with one rate hike in 1Q17 and a further one in the second half of next year.”