July Jobs Report Positive, But Wait for Inflation Data to Change December Hike Odds

The July jobs report was strong: Continued strength in payroll growth, the decline in the unemployment rate,  the increase in the participation rate, and a solid gain in average hourly earnings are all positive signs.  However, we don’t see it meaningfully affecting the December decision on whether to hike rates for the third time this year. We continue to expect the next rate hike to come at the December meeting, but that decision will depend on the inflation data and whether the recent softness proves temporary. We believe the FOMC  needs to see evidence of inflation firming before pulling the trigger on the next rate hike. As for the announcement of the beginning of the phasing out of reinvestment, we expect it will happen in September,  and it wouldn’t be economic data that would delay it.  

Payrolls increased 209K in July, well above the consensus expectation (180K), with negligible revisions to previous months. The three- and six-month average increases are 195K and 179K respectively, little changed.  Average hourly earnings increased 0.34%, larger than recent gains, but the 12-month rate remained at 2.5%  and the story remains that, despite the continued strength in the labor market, wage gains haven’t accelerated. As for the household survey, the unemployment rate edged down a tenth, to 4.3%, reversing the one-tenth uptick in June, as employment increased sufficiently to overcome a rise in the labor force and labor force participation rate. The broader U-6 unemployment rate remained at 8.6% 

Hawks are likely to interpret these figures as reinforcing their view that the FOMC should resume rate hikes in December, if not sooner, as the unemployment rate is already below participants’ median estimate of the  NAIRU and the momentum in growth and the labor market suggests it will steadily decline for some time.  Despite the recent soft inflation data, they still worry about getting behind the curve. But doves, more concerned about the soft inflation data, would point out that subdued wage data suggest that the labor market might have more room to run and that there’s no risk of overheating. They are in wait-and-see mode with respect to the incoming data on inflation between now and December. 

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