August is a notorious month for the market overestimating the rate of jobs growth with the miss ranging from 11,000 to 88,000 over the past five years; yet again this has proved to be the case with 151,000 jobs added against expectations of 180,000 jobs added. The strong July figure was revised up from 255,000 to 275,000 jobs and the two month revision came in at - 1,000. The unemployment rate was unchanged from the previous month at 4.9 percent and the participation rate was unchanged at 62.8 percent. The average hourly earnings came in at 2.4 percent yoy, slightly below with expectations and the prior month. Average hours worked edged lower to 34.3.
Ahead of the release the futures were looking for a 34 percent chance of a hike in September this year and a 59.8 percent probability of a hike by the end of the year. Expectations have reset somewhat on the back of today’s weak data: at the time of writing the market now pricing in a 22 percent chance of a hike in September at the time of writing and the probability for a December hike has also eased to 54.9 percent.
Today’s figure disappointed versus the consensus estimate of 180,000 jobs added. But the issue is what level of job growth the Fed would now view as continuing to show an improving labour market in terms of its dual mandate maximum sustainable employment and an inflation rate of 2 percent. Stanley Fischer, the Fed Vice Chairman, stated in his 21 August Aspen speech; “So far in 2016, nonfarm payroll gains have averaged about 185,000 per month--down from last year's pace of 230,000, but still more than enough to represent a continued improvement in labor market conditions. Estimates of monthly job gains needed to keep the unemployment rate steady range widely, from around 75,000 per month to 150,000 per month, depending on what happens to labor force participation among other things.”
Nevertheless, as William Dudley, the New York Fed President, has noted there is an asymmetric risk of adjusting policy too soon ‘given how close we remain to the zero bound for interest rates.’ Given today’s data, the weak GDP data along with yesterday’s August manufacturing ISM falling back into contractionary territory, we expect the Fed is likely to remain ‘patient’ and take a very gradual approach to tightening rates.
In our opinion, the Fed will remain ‘ahead of the curve’ and the yield curve will continue to flatten favouring positioning at the long end on a duration weighted basis. US growth has been patchy and uneven since the GFC, business investment is weak, productivity gains have been disappointing, inequalities are large and inflationary pressures are benign; on top of this there are negative structural trends such an ageing population and secular stagnation which supports a low neutral interest rate. Against this backdrop, the hunt for yield in global markets has further to run: high quality bonds from creditors, particularly those offering positive yields, remain one of the more attractive places to be positioned.