Daily Commentary BY THE CURVE TEAM –

Non-farms Overshadows Trade Talk

12th of March, 2018

The February non-farm payrolls report ticked every box as far as markets were concerned. Jobs growth surged and wages remained contained. It was certainly enough to take some of the focus of trade talk with the two and fro between Trump and the rest of the world continuing.

The US non-farm payrolls report was warmly welcomed by markets on Friday. Total jobs growth was a very solid 313,000 for the month with some substantial upward revisions to the previous two months. The unemployment and underemployment rates both remained unchanged at 4.1% and 8.2% respectively.

The most important number was the wages figure with the miss in the actual result garnering the most attention. Average hourly earnings were up 0.1% against expectations of a 0.2% rise. That saw the annual rate slow down from a revised 2.8% the previous month to 2.6% in February.

While the market was excited that wages are contained, it is likely to have little impact on the outlook for the Fed. The market still seems to have the mindset that it is up to the data to justify the Fed’s intention to lift rates. Given the strength of the Fed’s ongoing insistence that rates are rising at least 3, maybe 4, times this year, it is actually up to the data to stop them.

What that means is that unless we see a material deterioration in the data over the months ahead, the hikes are going to come and keep coming. The Fed is worried about repeating history and leaving rates too low for too long and are going to keep hiking unless the data forces them not too.

It is not about whether or not the data such as inflation or wages continue to trend higher. What matters is that the data doesn’t give the Fed a reason to pull back. This week will be equally important with CPI, PPI and retails sales among the key data to watch in the US ahead of next week’s FOMC meeting where a rate is full priced. It is hard to fathom that the market only has the chance of three hikes this year at 40% and has 4 hikes at a 24% probability.

There will be plenty to look out for on the local front with the latest business and consumer surveys out along with lending data for January.

David Flanagan

Director - Interest Rate Markets