May’s unemployment rate fell to the lowest level since April 2000 to 3.8%, with net jobs of 223K. Meanwhile, the labour force participation rate slipped for the fourth consecutive month to 62.7% in May. However, average hourly earnings in May grew 2.7% y/y. We expect the positive momentum to stay. A stronger drop in the unemployment level or a big raise in the average hourly earnings can stoke inflation fears and allow the Fed to become more hawkish and cause some volatility in the global financial market as what we witnessed in February. We reiterate our view that the Fed will raise rates during the June FOMC meeting by 25bps and another rate hike in September, bringing the total rate hikes to three. For a fourth rate hike to materialize, which is more likely in December, the economy needs stronger inflation, wages and key macro data which is currently low from our assessment.

• May’s unemployment rate fell to the lowest level since April 2000. The economy registered an unemployment rate of 3.8% from 4.1% in April, beating our forecast of 4.0%. The economy also added 223K jobs in May from 156K in April. But the labour force participation rate slipped for the fourth consecutive month to 62.7% in May from 62.8% in April. However, average hourly earnings in May grew 2.7% y/y from 2.6% y/y in April.

• With the 92nd consecutive month of job creation, we expect the positive momentum to stay. A stronger drop in the unemployment level or a big raise in the average hourly earnings can stoke inflation fears and raise the Fed’s hawkish tone. Potential global volatility could emerge, somewhat similar to the February scenario.

• We reiterate our view that the Fed will raise rates during the June FOMC meeting by 25bps with another hike in September, bringing the total to three rate hikes in 2018. A fourth rate hike will depend on how strong the inflation, wages and key macro data comes out to justify a hike in December, which is currently low in our assessment.

Source: AmInvest Research - 4 Jun 2018