Friday’s release of the April non-farm payrolls data in the US was a big miss with a print of just 160,000 jobs and a negative revision of 19,000 to previous months results.
That’s indicative of a recent loss of momentum in the US which has prompted the US Economics team at Bank of America Merrill Lynch (BAML) to revise its forecast for Fed rate hikes from June and December to just one increase in September.
The bank says there are three reasons for the change:
1. There has been a loss of momentum in the US data, even controlling for distortions to 1Q GDP.
2. We believe the Fed is engaging in “opportunistic reflation”, targeting inflation above 2%.
3. Although financial conditions have improved, there are still concerns about an uncertainty shock related to the markets, UK referendum and US elections.
BAML’s economists stress that it wasn’t just the weaker than expected US jobs report which drove the “the revision to our call for the Fed”. Rather it was “simply the last of a string of softer indicators that has prompted us to change our forecast”.
Interestingly they add an apparent caveat to remind clients the US economy and the Fed are in a very different position to much of the developed world at the moment.
“Remember, the economy is still expanding, inflation is still accelerating and the Fed is still normalizing,” BAML said.