June jobs report enables Fed to stay aggressive
Non-farm payrolls in the US grew a solid 372,000 in June, only slightly below 384,000 in May. The unemployment rate was unchanged at 3.6%. Solid job creation in June contrasted with most other recent US economic data (and in particular weak business and consumer surveys) and allows the Fed to brush off recessionary noise and remain focused on its main worry that high inflation expectations become entrenched. It is therefore more likely to deliver a 75bps rate rise at its 27 July policy meeting than a 50bps one.
From an inflation standpoint, relatively tame wage growth of only 0.3% month-on-month in June (compared with 0.4% in May and 0.3% in April) was welcome news, as was the moderation in the year-on-year increase to 5.1% from 5.3% in May. It is hard to see a wage-price spiral at work here, so we remain confident that US inflation will stabilise over the summer before dropping sharply by year’s end. This said, the Fed may worry that consumers, disoriented by recent price rises, question the Fed’s credibility on the issue. The Fed has lately put more emphasis on consumer surveys of future inflation rather than the actual mechanisms of inflation formation (such as wage growth).
Overall, we continue to think the Fed will moderate the pace of rate increases after summer, settling on hikes of +25bps (instead of +75bps) from September until December, when we expect the Fed rate to peak at 3.25%. This is because we think that US economic data could continue to erode and extend to employment figures, causing the Fed to alter its single-minded focus on inflation. Our macroeconomic scenario remains that the US will experience a mild economic recession in early 2023. However, we do recognise that the Fed could decide to front-load rate hikes (going for +50bps in September instead of +25bp, for example) but then end its rate-hiking cycle earlier.