Solid labour market data in February
The jobs report for February due on Friday seems to be the last thing which potentially could halt a Fed hike at the upcoming meeting (see next section). Preliminary labour market data for February have been solid, with low initial claims and Markit PMI employment index pointing to significant labour market progress. We estimate non-farm payrolls increased by 190,000 in February in line with the recent trend and in line with the consensus. We estimate private services was the main contributor to job growth with 160,000 new jobs but we also expect the progress in manufacturing employment observed during the last two months continued in February, with an increase in manufacturing employment of 20,000 as manufacturing activity indicators continue to point towards progress. We estimate unemployment remained flat at 4.8% and that average hourly earnings increased 0.3% m/m, implying a small increase in the wage growth rate of 2.8% y/y. The pickup in wage growth is due to a correction from the January figures, where wages in financial activities fell 1.0% m/m and thus dragged down total wage growth.
The January report showed that 227,000 new jobs were created. However, the unemployment rate increased from 4.7% to 4.8%. The increase in unemployment is mainly due to an increasing participation rate and should therefore not be considered a sign of labour market weakness – on the contrary.
As growth has picked up pace after the slowdown in H1 16, we expect jobs growth to continue around the current pace in coming months, which should be sufficient to tighten the labour market further. That said, there is still slack left in the labour market (see spider web chart on the next page), as the number of marginally attached and part-time workers for economic reasons is still high and the number of long-term unemployed is still elevated.
Fed is set to hike unless the jobs report is extremely weak
In Friday’s speech, Fed Chair Janet Yellen confirmed that the Fed is set to hike at the upcoming meeting ending on 15 March, unless the jobs report for February is extremely weak. We probably need to see jobs growth below 100,000, a higher unemployment rate and no improvement in the weak earnings data in January before the FOMC members change their minds. As we expect the jobs report to be good, we expect the Fed to deliver. Markets have priced in an 85% probability of a Fed hike in March.
We now expect the Fed to hike three times this year in March, July and December, as the Feb seems less worried about inflation and has increased its weighting on labour market and growth data. In her speech, Yellen hinted that four hikes this year means that monetary policy becomes neutral and we think the Fed wants to keep monetary policy slightly accommodative, as there is still slack left in the labour market. We still expect the Fed to hike three-four times next year, as the neutral rate should move higher.