• US adds 155,000 jobs in November

• Wages climb 3.1% in past 12 months

• Unemployment rate stays at 3.7%

• December Fed hike is on despite slight miss

Hiring activity slowed in November, with nonfarm payrolls rising by 155,000 positions. The soft reading comes after the change in total nonfarm payroll employment for October which was revised down from 250,000 to 237,000, and the change for September was revised up from 118,000 to 119,000. With these revisions, employment gains in September and October combined were 12,000 less than previously reported.

Hiring activity slowed for both the goods and services sides of the economy. The falloff in hiring in November was abetted by a disappointing 5,000 rise in construction employment that was down from an average gain over the previous three months of 23,000. The increase was also restrained by government employment dropping 6,000 after a 14,000 decline in October. Some offset was provided by a solid 18,000 gain in the retail sector whilst other areas of strength included healthcare (+32,000), manufacturing (+27,000) and transportation and warehousing (+25,000).

The disappointing headline figure is somewhat mitigated by the unemployment rate holding at its cycle low of 3.7% for the third consecutive month. The overall labor force participation rate also held on to its October gain, and is at 62.9% — broadly unchanged over the past year.

The closely watched measure of wage growth – average hourly earnings – rose 0.2% on the month, as markets were expecting. Wages grew at a 3.1% pace over the past 12 months, the same as in October.

In November, the unemployment rate was 3.7% for the third month in a row, and the number of unemployed persons was little changed at 6.0m. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 641,000, respectively. The November unemployment rate of 3.7% is in fact indicative of the economy already operating beyond capacity given the Fed’s own estimate of a long-run equilibrium unemployment rate as being within a range of 4.3% to 4.6%.

The November wage measure reported an unchanged annual rate of increase of 3.1% though this rate has been steadily rising in earlier months and compares to a year ago rate of 2.5%. Like last month, this represents the highest rate of wage growth since 2009 and is the primary factor that should keep the Fed on track to raise interest rates another 25bps at its meeting later this month.

December Fed hike is on despite slight miss

The US added another 155,000 jobs last month which was below the forecast, while October figures were revised lower to 237,000 from the first estimate of 250,000. This number will not help to alter the pessimistic mood on financial markets week, but a slower pace of hiring was bound to happen. As labor markets tighten, it gets tougher for employers to find people to hire. It is hard to pin slower hiring on any factor or industry. Hiring has averaged 195,000 new jobs per month over the past six months, but, it is still above the trend through most of 2017, and is actually not too bad given the mature phase of the economic cycle.

With wage growth also falling short of market expectations – rising only 0.2% mom vs the 0.3% forecast – the USD has found itself back in the crosshairs of bearish investors. The latest NFP’s uninspiring report certainly addresses recent concerns over the US economy potentially decelerating, given the inversion of the US Treasury yield curve last week. Although the unemployment rate remained unchanged at 3.7%, the overall US jobs report remains USD negative and is likely to create some uncertainty over the Fed’s hiking path beyond December.

The USD was mixed on Friday after a disappointing US jobs report but overall the report will have a small impact on the December Fed meeting. The Federal Open Market Committee (FOMC) holds its last policy meeting of the year on December 19. A few weeks ago, there was near unanimity among investors that the FOMC would raise rates by another 25 bps. The last few weeks has seen some mildly disappointing data and increased market volatility.

However, we believe that the Federal Reserve is not likely to put too much weight on a onemonth moderation in hiring activity, and will likely focus on broader measures of labor market slack, like the unemployment rate or wage growth, which remained steady in November. We see a December rate hike as largely a done deal. However, it is undeniable that core inflation has lost momentum in recent months. Though the November rate of increase in wages does not threaten the Fed’s inflation objective of 2.0%, such is not the case if the upward trajectory continues. To try to limit the inflationary risk of an economy operating beyond capacity, we assume that the Fed will continue to move interest rates higher. Our forecast assumes a 25 bps hike in the current fed funds range of 2.00% to 2.25% at the upcoming December 18/19 FOMC meeting.

What investors are focusing on is the effect it will have on future rate hikes in 2019. Fed member comments and softer data continue to make a case for less rate hikes next year. Inflationary pressures remain subdued and this week’s CPI and retail sales could further cement a narrative of a pause in the tightening of monetary policy by the Fed. While we expect price pressures to pick back up in the coming months, above-target inflation is less of a threat for the Fed. That underpins our expectation that Fed hikes will be more gradual in 2019, as the economy slows.

Source: BIMB Securities Research - 10 Dec 2018