US employment data: Increase in hourly earnings to be supportive of a mid-year Fed hike

We may have reached the end of a fairly busy week in the markets but it’s certainly not over yet as we await arguably the most important release of all of them, the US jobs report.

The timing of the first Fed rate hike has been debated for months now, ever since it became apparent that not only is the US recovery sustainable, it’s extremely robust and becoming more so with every passing month. All you have to do is look at the average number of jobs created over the last three months – 336,000 – to see that confidence in the economic outlook is growing and only likely to improve as wage growth accelerates and oil prices remain low.

While many people across the globe are worrying about inflation, or a lack of it, the US appears to be experiencing something similar to the UK, which has been labelled “good deflation”. The decline in oil prices in particular has weighed heavily on inflation readings and even indirectly, core readings which are meant to strip out volatile components such as oil, but this is far from a bad thing.

What it effectively does is act as a tax break for the public putting a little more money in their pocket. In an economy like the US in which consumer spending is so important, not only is this not a bad thing, as long as the deflation doesn’t become more broad based, it acts as an economic stimulus, aiding the recovery rather than hindering it. This can only help job growth as more are created to cope with increasing demand.

Unfortunately, the poor weather in February is likely to have had a negative impact on job creation, particularly in areas such as construction and retail, which may depress the number a little. Job losses in the oil in the oil industry also won’t help as drilling slowed and the number of rigs declined even though production continued to rise.

Even with all of this, 240,000 jobs are expected to have been created last month which is well below the three month average but still very impressive, especially under the circumstances. That said, Wednesday’s ADP release showed only 212,000 jobs being created which, despite not generally being viewed as a reliable estimate of the NFP, may suggest that expectations are still too high. The unemployment rate is still expected to fall to 5.6% though, very close to the levels that the Fed deems full employment at which point we start to see wage growth that brings with it inflationary pressures.

Another aspect of the report that can be overlooked by some but is becoming increasingly important as we approach the first Fed rate hike is average hourly earnings and hours worked. An increase in hourly earnings effectively acts as a warning of future inflation and all the warning signs are there that this is not too far away. Last month this rose to 2.2% compared to last year and if we continue to see numbers around this level, it may convince the Fed that low inflation is not something to worry about and instead they need to consider preparing for higher inflation, which means a rate hike in the middle of the year.

The FTSE is expected to open 1 point lower, the CAC 8 points lower and the DAX unchanged.