Rob Carnell, Chief International Economist at ING, notes that the December Labour market report shows why it is wrong to write off a March hike from the Fed.
Key Quotes
The key figure here is average hourly earnings – now rising at 2.9%YoY, its highest rate of growth since June 2009. Along with rising headline inflation the Fed is probably looking back to its 3-hike 2017 dot-diagram, and thinking ”told you so!”
We still think there may only be 2 hikes in 2017, but believe there is a very strong case for a March hike now, and are forecasting just that. Were we to see only 2 hikes in 2017, it is most likely to be because the Fed switches its attention later in the year to balance sheet adjustment, rather than rate hikes.
The rest of the report was somewhat mixed. Payrolls rose 156K, lower than the consensus 175K (INGf 150K). But this is still enough to more than absorb the growth in the labour force, so no grounds for real disappointment. And the unemployment rate ticked back up from 4.6% to 4.7% (ING f 4.8%), which is just noise caused by labour participation volatility.
In short, this report underlines that the US labour market is tight, and getting tighter. The Fed will not want to hang about before tightening again. This is the message we believe Janet Yellen will try to get across in her speech next Friday.
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