AXA IM's David Page - US reaction - Mixed payrolls report fails to shift outlook

David Page, Senior Economist at AXA IM, comments on US payroll

  • Headline payrolls fell short of expectations at 168k, although the shortfall was more than made up for with revisions to the previous two months.
  • Unemployment dropped to 3.9% and its lowest since December 2000, underemployment fell back to 7.8% a 2001 low.
  • Average earnings fell short of expectation at 2.6%, unchanged on a downward revised March figure.
  • We expect unemployment to edge lower over the rest of this year and for modest acceleration in wage growth (earnings to average 2.9% this year).
  • We do not expect the Fed to change course on the back of this report and continue to expect a June rate hike.

“The April labour market report saw some mixed messages. The headline payrolls rise of 168k fell short of consensus expectations (for 190k). However, this 22k shortfall was offset by the +30k net upward revision to the previous few months, including March’s reading being revised higher to 135k (from 102k). Unemployment dropped to 3.9% (below expectation of 4.0%) and its lowest level since December 2000. Meanwhile average earnings once again disappointed, with April’s annual rate recording just 2.6%, unchanged on a downward revised 2.6% (from 2.7%) in March.

“The fall in unemployment to 3.9% came despite stagnation in the household employment survey (+3k) which was still suffering a hangover from the 1194k gain at the start of the year. However, the labour supply shrank again in April (again offsetting large gains in January and February), the participation rate dropped to 62.8% and unemployment dropped. Assuming a return to modest growth in both household employment and labour supply, we expect to see the unemployment rate edge lower across the rest of this year, forecasting a rate of 3.7% by year-end.

“Average earnings disappointed once again, coming in at just 2.6%, below expectation. On the face of it this continues to question how tight the US labour market is, even at these levels. However, we note that beyond the 17-year low in unemployment, the U6 underemployment measure also fell back to its lowest level since H1 2001. Survey evidence also continue to point to higher wages.  However, we note that the average earnings measure appears to lag the employment cost index, but that this measure rose to a 10-year high with it last print in Q1, suggesting modest acceleration in average earnings over the coming quarters. We maintain our outlook for earnings to average 2.9% for this year as a whole.

“The Federal Reserve will take broadly two take-aways from this report. The first is that the labour market looks set to tighten further than it expected in March (in March it forecast unemployment ending the year at 3.8%). The second is that this may still be above a point where wage inflation materially accelerates. For now, we expect the Fed to stay the course with its gradual tightening in monetary policy, including at the next meeting in June. Over the medium-term we continue to expect wage growth to rise. However, if it fails to do so, the Fed could slow the pace of tightening.

“Financial markets saw little reaction on the back of today’s mixed reports. After initial reactions, 2-year and 10-year yields were left unchanged at 2.47% and 2.93% respectively. The dollar edged higher against a broad basket of currencies. Meanwhile the probability markets attach to a June hike remained at 100%, with 75% chance of a September hike and just over 50% chance of a December rise. We continue to forecast FFR closing this year at 2.25-2.50%.”




Jayne Adair

+44 20 7003 2232

Emma Collins

+44 20 7003 2783

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