Soft US payrolls will please the Fed
A soft payrolls report, across the board - October payrolls came in weaker than expected at 150k vs 180k consensus, net revisions subtracted 101k from previous months, while unemployment rose one tenth to 3.9%. While part of the weakness in the October report was due to temporary effects of the United Auto Workers union strikes (this subtracted around 30k jobs), the most important for us was the significant downward revisions which suggests the September blowout jobs report was an aberration (as we had suspected at the time, and as discussed in our October Monthly). Today’s data is more consistent with the longer term cooling trend in the labour market, as well as other labour market indicators such as continuing jobless claims, which resumed their rising trend over the past month or so.
Crucial for the inflation outlook, wage growth remained remarkably benign, with hourly earnings rising just 0.2% m/m, against expectations for a rebound from recent subdued readings. While the September wage data was revised slightly higher, both y/y and 3m/3m measures of wage growth cooled further, with the latter now in line with the pre-pandemic peak at just 3.9% annualised – a level that is already consistent with the Fed meeting its 2% inflation target over time. The cooling in wage and broader labour cost pressures is reflected in the sharp fall in unit labour cost growth, which a separate report earlier this week also suggests is now close to the pre-pandemic norm. This is thanks not only to falling nominal wage growth, but also rising productivity growth. This should further dampen the pass-through from already relatively benign wage pressures to services inflation. Looking at a broad set of labour market indicators, the overwhelming message now is one of a significant easing in labour market tightness. For instance, the rate of job switching has returned to the pre-pandemic level, while average weekly hours worked have fallen significantly and are also back at the pre-pandemic level. The latter is typically a precursor to further falls in jobs growth and to rises in unemployment, which is our base case.
The Fed will be pleased – The soft labour market report sends a strong signal to the Fed that policy is indeed sufficiently restrictive to return inflation to the 2% target, and it adds to our conviction that the FOMC has now reached the end of its rate hike cycle.
