FX Strategists at UOB Group assessed the recent results from the US labour market and their implications on the Fed’s tightening.
“While the US jobs market continued its healthy pace of adding 201,000 jobs in Aug (better than Bloomberg consensus forecast of 191,000 and also better than the ADP print of 163,000 in Aug), the big surprise was the 2.9%y/y jump in wages, the highest since Jun 2009, which helped boost market expectations that the Fed is increasingly likely to hike for a fourth time this year, in December”.
“Market rate hike expectations for a September 2018 hike edged higher to 96.3% (from 95.2% pre-NFP release), based on trading in futures and options data compiled by Bloomberg (WIRP). The probability of a December rate hike also increased to 66.9% (from 61.4% pre-NFP). While the latest US jobs and wages data puts a Sep Fed rate hike at near certainty and increased the likelihood of a fourth hike in Dec, the market attention on Friday (7 Sep) remains on US trade policy developments, especially when US president Trump decided to up the risk of further escalating trade tensions with China by imposing tariffs on US$200bn of Chinese goods which he said “could take place very soon” after the consultation period has ended and threatening to impose tariffs on the remaining US$267bn of Chinese goods “ready to go on short notice if I want”. That would cover nearly all Chinese imports into US”.
“We maintain our Fed rate trajectory in 2018 and we continue to expect two more hikes in 2H 2018 (Sep and Dec FOMC) to bring the FFTR range to 2.25%-2.50% by end-2018. That said, even if the Fed hikes four times this year – which represents the fastest annual pace of normalization since the Fed started hiking rates in 2015 – we do not see it as excessive US monetary tightening. We also maintain our 2019 rate hike expectation at three 25bps hikes which now implies that we expect the Fed to exceed their long run FFTR at 3.0% by mid-2019. While we remain mindful that stronger wage and inflation expectations could add to the risk of a more aggressive Fed in terms of policy normalization, the elephant in the room is clearly the escalating US-China trade tensions which could warrant a more cautious Fed”.
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