US: After NFP, we still expect no rate hike in 2016 - Danske Bank

According to Senior Analyst, Mikael Olai Milhøj from Danske Bank, the US September jobs report was not the “smoking gun” for a December interest rate hike from the Federal Reserve. He still sees slack left in the labour market.

Key Quotes: 

“Nonfarm payrolls rose 156,000 in September, in line with our expectations of 160,000 but below consensus of 172,000. There were no big revisions to the last two months (combined -7,000). Thus it seems that the strong jobs reports in the summer were mainly due to the weakness in the spring. Employment growth was driven by the service sector, while manufacturing employment fell again. Overall, employment growth has slowed this year.”

“The details reveal there is still slack left in the labour market as the unemployment rate rose from 4.9% to 5.0% and the underemployment rate (a broader unemployment measure) was unchanged at 9.7%. The higher unemployment rate despite increasing employment is due to an increasing labour force.”

 While it is positive that more workers are returning to the labour force (perhaps due to better employment prospects), it is also a sign that there was more slack in the labour market than previously thought. The underemployment rate has stopped declining and has been more or less constant over the last 12 months. This broader unemployment measure has previously been one of Yellen’s favourite slack measures.”

“Overall, the September jobs report was not the ‘smoking gun’ for the Fed. For now we stick to our non-consensus view that the Fed will stay on hold until H1 17, although it is a close call whether the Fed will hike or not in December. The reason for our call is that the Fed seems too optimistic on Q3 GDP growth and we fear that economic data may disappoint in the short-term. The combination of weak GDP growth over the past three quarters, still slack left in the labour market, subdued wage growth, low inflation expectations and core inflation still below 2%, means that the Fed can afford to stay patient. A November hike seems unlikely due to the Presidential election just a week after the next FOMC meeting. Markets have priced in a two-thirds probability of a hike by the turn of the year.”