It’s been heard many times before, but this Friday’s August non-farm payrolls report in the US looms as perhaps the most important data release in terms of the near-term outlook for US interest rates.
While there is always a focus on the headline payrolls figure, markets, as they have been for some time, will be acutely focused on the average weekly earnings figure, given its implications for inflation, hence the outlook for rates.
Any acceleration, at a time when the US labour market is closing in on full employment, is likely to be interpreted as a signal that another rate increase is imminent.
Well, markets might not be waiting all that long.
According to Macquarie Bank analysts David Doyle and Brendan Livingstone, wage growth, a critical component in terms of helping to boost underlying inflation, is now broadening across the US, led by non-oil states.
As a starting point, the pair point to the chart below that breaks down year-on-year average hourly earnings by oil and non-oil states.
Macquarie classifies “oil states” as Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming, with all other states grouped as “non-oil”.
There’s clearly a divergence between the two, with wage growth in non-oil states far stronger than that seen in oil states, accelerating sharply over the course of 2016.
“Despite this headwind, national wage growth has moved to a post cycle high – a testament to wage growth improvement in non-oil states,” say Doyle and Livingstone. “This group is more representative of underlying labour market dynamics (they represent ~87% of national employment).
“Wage growth in non-oil states was 2.9% YoY as of Jun-16 and has been improving rapidly”.
And Doyle and Livingstone expect that trend to continue which, in unison with a reduced drag from wage growth in oil states, will push headline wage growth higher.
“Looking ahead, we expect wage growth in non-oil states to propel headline numbers higher. We also believe the drag from oil-states should lessen as there is growing evidence of a bottoming in activity levels,” they say.
The chart below, also from Macquarie, helps to bolster that view, with the percentage of non-oil states with wage growth running above 3% per annum surging in recent months.
“In the last two economic cycles this foreshadowed a further acceleration in headline wage growth,” they note.
Even with this expected acceleration in wage inflation, seemingly providing a green light to the Fed to raise rates in the absence of external factors, Doyle and Livingstone don’t believe it will lead to an aggressive policy response that could potentially rattle markets.
“Even with this improvement, we believe the Fed is likely to hike rates only cautiously and gradually,” they say, suggesting that its base-case scenario remains for a hike in December and two in 2017.
“This should lead to a continued bullish backdrop for equities. Higher nominal growth should lead to stronger corporate earnings (while) low rates should mean the theme of financial repression continues.”
August US non-farm payrolls will be released at 8.30am EDT on Friday (10.30pm AEST in Australia).
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