The August non-farm payroll report has once again disappointed having done so for the past 6 consecutive years (during the month of August), and today only 156,000 jobs were added which was below expectations of 180,000 jobs created. Expectations had perhaps built for a stronger report on the back of the ADP employment estimate earlier in the week which came in well ahead of expectations (of 185,000 jobs) registering 237,000 jobs added. August has proved a notoriously difficult month to predict and in the past six years the initial estimate has then ended being revised upwards. July’s reading was revised down to 189,000 jobs from 209,000. Other aspects of the report can be considered weak too. The participation rate was unchanged at 62.9% and the unemployment rate edged higher to 4.4%. Average hourly earnings continued to remain muted and were below market expectations at 0.1% mom and 2.5% yoy and average hours worked edged lower to 34.4.
This week has also seen a number of stronger data points as US consumer confidence hit the second highest level since 2000 and the second estimate of US Q2 GDP (quarterly annualised) was revised up to 3% with a strong upward revision to the consumption data which registered 3.3% growth. That said, Trump’s speech on Tax reform was short on detail indicating a broad corporate tax target of 15%; with the debt ceiling and budget ceiling still to be addressed by Congress it is difficult to see any policy initiatives getting passed and implemented quickly so as to meaningfully and sustainably boost the US growth outlook above 3%. But getting a read on how the US economy is tracking is likely to be complicated over the next couple of quarters as data releases could see some distortion from the disruption and rebuilding impact of Hurricane Harvey: Houston is the fourth largest city in the US.
Critically, for the US the inflation and wage picture remains extremely benign: yesterday’s July PCE deflator was in line with expectations at only 1.4% for both the headline and core readings. We still expect that the Fed will announce the beginning of its balance sheet normalisation program at the September 19-20 meeting but, given the still soft inflation picture, we expect that they will adopt a cautious approach and leave interest rates unchanged, preferring instead to monitor how the situation evolves. The key issue is whether the softening in inflation is transitory or whether progress towards the inflation objective may have slowed and this softness could persist. For example, the Dallas Fed President Robert Kaplan, a voter on the committee, said in an interview: ‘I’m glad we’ve raised rates twice this year. I was a strong advocate for both those. I’m basically just saying, now that we’re getting closer to neutral and these conflicting forces are playing out regarding inflation… I’m not saying I won’t be in favor of raising rates before the end of the year, but I want to—I think we have the ability to be patient, and I want to see more information that suggests we’re making progress in meeting our 2% inflation objective.’
Benign inflation data has muted investor expectations for further rate rises later this year, reinforced by today’s data, and supported the US Treasury 10 year yield at 2.13% at the time of writing. Our view remains that the Fed will remain ahead of the curve and the yield curve will flatten so we continue to favour positioning at the long end.