Daily Insight – US job report a game changer?

by: Maritza Cabezas , Georgette Boele

  • Rebound in US labour market expected after upbeat signals…
  • … while US wage growth should pick up moderately, prompting the Fed to hike rates in September
  • UK elections: a parliamentary hung likely, still more downside for sterling


After a weak job market report, rebound expected

The job market showed signs of weakness in March. Today’s ADP employment report will give a taste of the job market report to be released on Friday. We think that both reports will show further improvement in the labour market after a short interruption. Indeed, after a harsh winter, we expect labour market indicators to make further progress. The most recent FOMC statement released in April already pointed to a more “moderate pace of job gains”, instead of “further improvement “ of labour market conditions as mentioned in the previous statement. The FOMC statement, however, suggested that the slowdown in economic activity during the winter months was only transitory. Actually job gains weren’t much different last year, when a harsh winter took a toll on the economy.

Upbeat signals in the US labour market

In the past few weeks, however, there have been signs that the labour market is improving. US jobless claims have been reporting historical lows. In the week ending April 25, jobless claims were at a 15 year low. The employment indexes from most surveys showed improvement since March, except for the ISM manufacturing report. We expect a nonfarm payrolls to rise by 225K, following March’s 126K print. Meanwhile the unemployment rate should decline to 5.4% in April.

US wages to pick up gradually

We expect Friday’s job market report to show a moderate rise in average hourly earnings in April. Despite a tightening labour market, wage growth has been somewhat subdued until recently. This could be changing. The employment cost index (ECI) released last week, which is a broad measure of wage and benefit expenses rose 0.7% in the first quarter, up from 0.5% gain in the last quarter of 2014. On an annual basis, labour costs rose 2.6% in the first quarter from 2.2% the previous quarter. A number of US firms have announced that they have increased wages recently to attract and retain workers. For the Fed a stronger job market report and a firming of wages would suggest that core inflation will pick up further. This could make Fed officials “reasonably confident “to hike rates. Our view remains that the Fed will hike rates in September.

UK elections a parliamentary hung likely

Opinion polls put the Conservatives and Labour neck and neck at 34 points each. This suggests that the outcome of UK elections will be one of the most uncertain since decades. After the elections, the lack of a clear parliamentary majority could require some time for matters to be resolved, even if the intentions are to begin talks quickly with coalition partners. Although there is still a day before Thursday’s elections, we think that this won’t be a game changer for Conservatives or Labour. Although we will have to wait for the outcome to assess the overall impact on the economy, we think that cyclical forces and the growth outlook are robust enough to withstand some uncertainty ahead.

Still more downside for sterling

Overall election uncertainty has not had a profound impact on sterling, but volatility has been increasing against the euro and the dollar in the past days. There is a high likelihood of a hung parliament and this political risk will weigh on sterling in our view. So we expect sterling to remain weak in the run-up to these elections. In addition, expectations that the Fed will hike before the BoE should also push sterling lower. In short, we remain negative on sterling versus the dollar.