US non-farm payrolls rise by 224,000 in June, calling Fed cuts in question

Hiring in the US picked up by a greater than expected 224,000 last month, leading some economists to trim their forecasts for interest rate cuts by the Federal Reserve at its next policy meeting on 30-31 July, whilst others dug in their heels against widespread predictions for imminent easing, anticipating instead that a move would come in September.

June's print on non-farm payrolls compared to a rise of 158,000 forecast by economists on the Street, following a downwardly-revised gain of 72,000 during May, and an average 183,000 increase over the previous three-month stretch.

In parallel, according to the Department of Labor, the US jobless rate ticked higher by a tenth of a percentage point from the month before to reach 3.7%, but mainly because the labour force participation rate also rose by a tenth of a point to 62.9%, as 335,000 more Americans entered the workforce.

Average weekly earnings grew by 0.2% month-on-month and 3.1% on the year, with the latter coming in a tad below the 3.2% advance expected by economists.

Following Friday's jobs data, as of 1352 BST, the yield on the benchmark two-year US Treasury note was racing higher by seven basis points to 1.83%, versus a session high of 1.85% and 2.55% one year ago.

In parallel, the US dollar spot index was adding 0.40% to 97.1560.

By sectors, hiring accelerated both in goods and services.

Withing the former, 37,000 new posts were created, following an 11,000 rise in May, led by a bounce in construction sector employment of 21,000 alongside 17,000 new hires in manufacturing.

Service sector hiring meanwhile recovered from May's pace of 72,000 to 154,000, even as employment in retail continued to languish in the face of the onslaught from digital outfits.

A proxy for the monthly rate of growth in gross domestic product, the index of aggregate weekly hours, rose by 0.2% month-on-month clip, following a drop of 0.2% in April and an increase of 0.1% for May.

Analysts react

In an initial reaction to the data, most economists appeared to still expect a 25 basis point rate cut from the Fed at July's Federal Open Market Committee meeting.

To take note of, on 3 July, strategists at Bank of America-Merrill Lynch had told clients that a rise in non-farm payrolls of 225,000 or more, together with a 0.4% increase in average hourly earnings might see rate-setters in Washington D.C. hold off from any reductions in the Fed funds rate.

In the event, Michael Gapen at Barclays Research trimmed his prediction from a 50 basis point reduction in the target range for the Fed funds rate to 25 basis points, although he continued to anticipate 75 basis points-worth of rate cuts by year-end 2019.

Oanda's senior market analyst in New York, Edward Moya, appeared to be of a broadly similar view, saying: "Trade tensions are not really hitting the labor market yet, but lack of international investment in the US will eventually hit the data points. The Fed never makes a decision off of one economic data point and the narrative remains inflation is subdued, and global growth concerns are heightened.

"Despite the strong rebound in jobs and steady wages, the Fed will still likely deliver a 25-basis point insurance cut at the end of the month. For the Fed to consider a 50 basis point cut, we will need to see the July 26th second quarter advance GDP reading deliver a sub-2% reading."

Andrew Hunter at Capital Economics did not agree, saying the data made a "mockery" of expectations for fed cuts and stuck by his previous forecast for the first rate hike to come in September.

"[The data] would seem to make a mockery of market expectations that the Fed will cut interest rates by up to 50bp late this month. Employment growth is still trending gradually lower but, with the stock market setting new records and trade talks back on (for now at least), the data support our view that Fed officials are more likely to wait until September before loosening policy."

For Ian Shepherdson at Pantheon Macroeconomics meanwhile: "The continued tightening of the labour market points to a gradual upward trend ahead [in wage growth], but nothing that will stop the Fed operating its policy of responding to tighter financial conditions with jawboning, dot manipulation, and, ultimately, lower rates.

"The economy does not need the Fed to ease, but the market continues to scream for action on July 31. This Fed won’t disappoint unless the data between now and then are so clear that market expectations shift substantially. That’s entirely possible, but don’t bet on it."