US job report confirms decent job growth with low wage pressure and plenty of slack

• The US employment report was a bit softer than expected. Overall, it still paints a picture of fairly robust job growth though. However, wage pressure is very low and there is plenty of slack in the labour market.

• The report does not change much for the Fed, although the low growth in wages is likely to give the Fed comfort that inflation pressure is moderate and that it can be patient before raising rates. In the short term, it may dampen some of the upward pressure on short-end yields in the US.

• Although unemployment rose slightly, the trend is still down and if it continues at the current pace, the Fed will hit the 5.4% long-term estimate for unemployment by Q2 15. Based on this and the recent change in signals from the Fed, we look for the first hike in April 2015.

• Core PCE inflation was also released and showed a rise of 0.1% m/m (0.144% unrounded) as expected. The y/y rate was flat at 1.5%, slightly above the consensus estimate of 1.4% y/y. The three-month annualised momentum in core PCE is still around 2%, suggesting that the annual rate will rise further over the coming three to six months and thus move closer to the Fed target of 2.0%.

Details

• Job growth was 209,000 in July versus consensus of 230,000. However, net revisions were +15,000, so overall it was pretty close to expectations. The three-month moving average is 245,000, down from 277,000 in June. It is still a fairly decent pace of job growth. By sector, the softness was mainly in services, rising only 140,000 versus an average of 220,000 over the past three months.

• The unemployment rate increased from 6.1% to 6.2% as the labour force increased 329,000. Employment in the household survey rose 131,000 down from 407,000 in June.

• Wage growth was very subdued in the report. Hourly earnings were flat in July versus the 0.2% m/m expected. The y/y rate in earnings was 2.0%, up from 1.9% in June (revised from 2.0%). Wage growth has been very stable around 2% for the past three years now, confirming that there is plenty of slack in the labour market.

• Aggregate hours rose 0.2% m/m, the same as in the previous two months and corresponding to 3.4% annualised.

• The nominal income proxy rose 5.0% on an annualised basis, still providing decent support to consumers.