Don't expect jobs data to jolt Fed

Thought of the day

by Chief Investment Office 06 Jun 2018

The US labor market showed further signs of tightening this week, with US JOLTS data showing job openings rising to a record high of 6.698m in April, far outpacing hiring. Data from the service sector added to positive signals, with the ISM non-manufacturing index jumping to 58.6 in May. A hot labor market, solid economic growth and the recent spike in oil prices might suggest growing price pressures ahead.

But we don’t yet see evidence inflation will rise beyond the Fed’s tolerance limit and trigger more rapid rate hikes:

  • While US unemployment of 3.8% represents a post-1969 low, the upward pressure it is exerting on wages has been limited so far. Data last week showed US average hourly earnings edged up only slightly to 2.7% in April. The US quit rate, key since the biggest raises tend to go to workers who leave jobs for higher pay elsewhere, held steady at 2.3% in April.
  • The Federal Reserve has repeatedly signaled that it won't overreact to a mild inflation overshoot, noting in the last minutes that “a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”
  • Other headwinds may preclude more aggressive Fed tightening, in our view. The latest Fed minutes noted economic risks around Trump administration tariffs, while influential Fed policymaker Lael Brainard this month cited Italian politics as reintroducing some risk and worsening financial conditions in the Eurozone.

We maintain our view that the Fed will hike rates by 25bps at the 13 June FOMC meeting, followed by an additional hike once per quarter for the remainder of the year. We remain overweight 10-year US Treasuries and overweight global equities.

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