Following today's jobs report, the market's reaction to the unexpectedly strong January payrolls visualized in the charts below, is straightforward: the disappointing wage growth is an indication that the Fed may not hike rates for quite a bit longer than expected, and will likely will be forced to reduce its rate hike expectations from 3 to 2 (in line with the market) or fewer if wage growth continue to stagnate.
Sure enough, Wall Street's strategists agree. As the following compilation of reactions shows, the prevailing reaction to today's report is that while January job gains beat expectations, slower wage growth and disappointing underemployment figures help temper expectations for a near-term Fed hike.
Some examples, courtesy of Bloomberg:
TD (Mark McCormick)
- Jobs number is sweet spot for risk markets; growth is holding up with little impetus to nudge the Fed into action next month
- A softer read on wages and uncertainty over the economic agenda probably keeps USD sidelined for a bit longer
- This scenario favors continued momentum in some of the growth-sensitive currencies; could see the rallies in AUD, NZD and even NOK persist near-term
BofA (Michelle Meyer)
- Investors were setting up for a higher number given upside surprise in ADP on Wednesday; however, this was offset by increase in unemployment and softness in wages
- Report suggests labor market might not be as tight as previously believed
- Likelihood of the Fed hiking in March is fairly low and jobs report consistent with that
- BofA expects one Fed rate increase this year, in September, with risk of two rate hikes
Bank of Tokyo-Mitsubishi (Chris Rupkey)
- January employment report “strikes a blow” in hopes for a faster pace of rate hikes from “slow and steady” Fed
- “‘Big jobs today, but what about tomorrow’ will be the concern from Fed officials”
- Fed will be unlikely to act before there’s more certainty in Trump policies that could boost growth, make easier monetary conditions from Fed less necessary
Societe Generale (Stephen Gallagher and Omair Sharif)
- Jobs report shows “no additional pressure on the Fed to move beyond its indications of gradual rate hikes”
- “Evidence on labor market tightness abated in January”
Goldman Sachs (led by Jan Hatzius)
- Report “appears consistent with healthy economic growth, but only moderate pressure on labor resources”
- Reduces odds of a rate hike in March to 15% from 35%
- Maintains call for 3 rate increases this year, in June, September and December
CIBC (Avery Shenfeld, note)
- Only sore spot in jobs report was avg hourly earnings
- “Although the annual rate of wage inflation was likely to decelerate a couple of ticks, the fall from the revised 2.8% to 2.5% will be seen as a counterbalance to the stronger headline payroll number”
Janus Capital (Bill Gross)
- “Schizophrenic report” doesn’t alleviate skepticism about 3-4 percent growth promised by Trump administration
- “I think we’re stuck in a 2% real GDP world”
- While slow wage growth may be good for corporate profits, for consumers, “if their money is only growing at 2.5%, that’s a slow-growth economy”
Market Securities (Christophe Barraud)
- January payrolls report “looks somehow disappointing,” will create uncertainty among policy makers that wage pressures are materializing and full employment is close
- Could damp expectations for tighter policy
- Slowing wage growth suggests both personal income and spending were weak in JanuaryUnderemployment results disappointed, while number of people working part-time increased by 242k; numbers don’t confirm that labor slack diminished
Marketfield Asset Management (Michael Shaoul)
- January jobs report “noisy” yet kept prior trends intact
- Weaker avg hourly earnings “greeted with some relief since it reduces the pressure on the FOMC to act in early part of 2017”
- Avg hourly earnings “is a lousy data series, but we accept it is one that the FOMC will follow when setting policy”
BNY Mellon (Marvin Loh)
- Tempered Fed expectations are biggest market takeaway from report, as it signals existence of more slack in labor market than headline unemployment rate would suggest
- “Any trough and subsequent increase in the participation rate would indicate continued jobs growth with limited wage pressure, a possible holy grail for corporate America”
- After report, anyone who thought Fed might raise rates in March will likely move their forecast to June
ING (James Knightley)
- Wages were a ‘big miss’’ but this likely is a “temporary slowdown with strong employment numbers ensuring that the trend is for faster wage growth in the months ahead”
- ING reiterates forecast for March Fed rate hike; expects that to be followed by another increase in 3Q
- “GDP growth on an upward trend”
- “Inflation figures looking consistent with the Fed’s medium term aspirations” so case for March hike “remains strong”
SouthBay (Andrew Zatlin)
- January data did not capture minimum wage hikes, which will show up in February, and that helped suppress wage inflation; expect a bigger jump next month
- If assumption is correct, the current environment of a patient Fed with slower and more gradual rate hikes could flip after next month’s jobs data
Evercore (Krishna Guha)
- January NFP report creates “little need for the Fed to pull forward the next rate hike to March”
- A move by May “is slightly more likely than not,” given strength in hiring
- Combination of strong employment growth with more supply to keep Fed “at bay” for now, “is perfect for U.S. equities”
Prestige Economics (Jason Schenker)
- Continued job creation backs hawkish Fed
- “A March Fed rate hike is a lock” after supportive jobs report and slightly stronger language regarding inflation in the Fed statement this week
- “We have been expecting a March rate hike, and only a shocking turn of policy or major upheaval in financial markets would derail that expectation”
- Sees upside risks for USD before Fed’s March meeting
Source: Bloomberg