US jobs report cements expectations of Fed hike next week - ING

James Knightley, a senior global economist at ING, argues that the US jobs report was very good, showing a 235,000 increase in non-farm payrolls with a net 9,000 upward revision to the past two months of data. Unemployment edged down to 4.7% (lowest since Nov ’07) from 4.8% while underemployment has dropped to 9.2% (lowest since Apr ’08) from 9.4%. Then we have wages coming in at 2.8%YoY, matching last month’s figure after some upward revisions to the history. Taking it all together we have a picture of strong job creation with the tightening labor market increasingly generating wage and inflationary pressures.

More from Knightley

"Ahead of this release financial markets were fully pricing in a 25bp rate hike from the Federal Reserve next week. Today’s data will only cement those expectations. As for the rest of the year, financial markets are pricing in just shy of two more 25bp hikes with the Fed’s dot forecasts suggesting FOMC members fully expect two more.

We are more cautious in penciling just one. We sense that the current optimism on the US outlook may be tempered somewhat with Congress likely to push back against some of President Trump’s more aggressive fiscal stimulus plans. We also think that the Fed will increasingly focus on balance sheet adjustment as a way of doing some of the heavy lifting. If the Fed reduces or stops the reinvestment of maturing bonds from its QE holdings this will remove a key buyer of Treasuries from the market. This should push longer dated yields higher, reducing the need for rate hikes at the short-end."