New jobs report disappoints, but shouldn’t stop the Fed

A June rate hike is still possible given longer-term employment trends

New jobs report disappoints, but shouldn’t stop the Fed

James OngCorum

Today’s jobs report from the US Bureau of Labor Statistics was headlined by a much lower-than-expected number, with nonfarm payrolls growing by just 98,000 in March. Yet, we at Invesco Fixed Income don’t think the results are as bad as the headline indicates, and it does not change our view of future Federal Reserve interest rate hikes.

 Analyzing the jobs report

The three-month moving average of the headline payroll number is 178,000, which is at the lower end of our estimate but not too out of line. A 178,000 payroll moving average is consistent with mid-2% gross domestic product growth, in our view.

The lower-than-expected headline number was likely driven in part by weather, which was good in February but not in March. The largest sources of disappointment were retail and construction jobs. While these sectors are weather-sensitive, they are also being affected by structural factors such as higher mortgage rates, competition from online retailers and more.

Household employment was up by 472, with a three-month moving average of 296,000. The employment rate dropped to 4.5% despite an above-trend increase in the labor force. The U6 unemployment rate, a broad definition that includes underemployed and discouraged workers, declined by 0.3%.

From a growth perspective, the most disappointing part of the report was limited wage growth and slow growth in hours worked. This will limit potential increases in real consumption, in our view.

What does this mean for the Fed?

This number does not change our view for potential Fed rate hikes in 2017. We believe the declining slack in the labor market will keep future rate increases in play. We do not agree with market observers who are saying that a June rate increase is off the table due to this number, unless 100,000 monthly payroll growth becomes a new trend. There are two more payroll releases before the Fed’s June meeting, and we expect the trend to be near 200,000.

Source for all data: US Bureau of Labor Statistics

Important information

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James Ong, CFA

Senior Macro Strategist

Derivative Portfolio Manager

James Ong is a Senior Macro Strategist and a Derivative Portfolio Manager for Invesco Fixed Income (IFI). Mr. Ong contributes economic and market analysis to the Macro Research platform. Mr. Ong leads IFI derivative strategy and oversees derivatives held in IFI portfolios.

Mr. Ong began his investment career in 2001. Prior to joining Invesco in 2014, he was a senior vice president, a senior portfolio manager and a senior trader at Hartford Investment Management Company.

Mr. Ong earned his BA degree in economics from Middlebury College. He is a CFA charterholder.

Noelle Corum, CFA

Macro Analyst

Invesco Fixed Income

Noelle Corum joined Invesco Fixed Income in August of 2010 and is involved in derivatives, FX
and rates trading, macro view implementation and asset allocation.

Ms. Corum began her investment professional career at Invesco following her undergraduate

She earned a BS degree in business administration, with a concentration in financial analysis,
from Saint Louis University, where she minored in mathematics and earned a certificate in
service leadership.

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