Monetary Policy & Inflation | US
No Fed Pivot! An Upside NFP Surprise
- By Dominique Dwor-Frecaut
- 6 min read
Summary
- August NFP surprised on the upside but continued to show slowing trend growth.
- Unemployment and participation fell, showing the labour market remains over-stretched.
- Wage growth did not increase.
Market Implications
- Today’s release supports a 75bp hike at the November FOMC meeting.
- It does not support a Fed pivot to slower hikes than currently priced in.
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Summary
- August NFP surprised on the upside but continued to show slowing trend growth.
- Unemployment and participation fell, showing the labour market remains over-stretched.
- Wage growth did not increase.
Market Implications
- Today’s release supports a 75bp hike at the November FOMC meeting.
- It does not support a Fed pivot to slower hikes than currently priced in.
Labour Market Remains Tight
September NFPs at 263,000, were higher than the 255,000 expected. In terms of YoY growth (a better indicator of trend than monthly NFP changes), employment growth continued to slow, ever so gradually, 3.9% against 4% in August (Chart 1).
Labour supply growth, however, did not increase: it was up 2% YoY, the same as in August. This reflected a decline in participation: average September participation fell by 10bp to 62.3%, against 62.4% expected. In turn, this reflected a 60bp decline in women’s prime age participation while men’s increased by 20bp. Average participation remains below its March 2022 peak.
With faster growth in labour demand than supply, unemployment fell by 20bp to 3.5%, against 3.7% expected, the lowest since 1965. Hours worked were unchanged and remain above pre-pandemic levels, another sign of a labour market experiencing strong resource pressures (Chart 2).
Wage Growth Weaker Than Suggested by Resource Pressures
Hourly wages growth remained 0.3% MoM in line with consensus and below my expectations. In part this reflected compositional effects. The share of low paid employment – mainly retail, leisure and hospitality services – continued to increase, which dragged down the average. And nominal wages increased by more than headline CPI’s 0.1% (September PCE will be released on 28 October).
At 5% YoY, wage growth remains well above the level consistent with 2% inflation. Since I expect goods price inflation to remain positive, and services price inflation is tightly correlated with wages growth, a return of inflation to target could require nominal wage growth below 2%.
Still, real wage growth remains well below productivity, which is a puzzle give how tight the labour market is (Chart 3).
Market Consequences
Overall, the September NFPs continued to paint the picture of an overstretched labour market. Despite relatively tame wage growth, this supports a 75bp hike at the 2 November FOMC meeting. Longer term, it also suggests a Fed pivot is unlikely anytime soon.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)