MUFG: Quick Thoughts from our strat desk: FXWW

From the FXWW Chatroom: There is certainly ample evidence here to suggest to the Fed that firstly, the labour market continues to improve but secondly there is nothing alarming still to suggest that the removal of slack has reached a level that prompts greater concern with the FOMC over the threat of wage inflation suddenly turning higher. Softer earnings growth, flat in October but lower unemployment rate at 4.1%.Net net it looks neutral, taking into account the hurricane distortions. Stripping out monthly volatility around the hurricanes, the underlying pace of average hourly earnings growth in the private sector is running around 2.5-2.8%. So still no clear sign that it is accelerating this year. It supports the Fed keeping a gradual pace of hikes with next one still highly likely in December and further deepens the current policy dilemma over why tightening labour market is not resulting in faster wage growth.For the FX market it should keep us in low volatility trading environment and is at the margin USD negative.
BNY: The US employment data was somewhat disappointing in that the expected monthly gain in nonfarm payrolls and wage growth were both below expectations.The headline NFP print was +261,000 versus a +313,000 expectation, although with the +51,000 revision to September’s data, the numbers came in much closer to the expected figure. The wage component was flat, however, with average hourly earnings at 0% on a m/m basis, bringing the y/y gain to 2.4% its lowest level of the year.

The unemployment rate (U3) ticked down to 4.1%, its lowest level since December 2000. This improvement was driven by the 40 bps decline in the participation rate to 62.7%, essentially unchanged from where we started the year. The underemployment rate (U6) continued to fall to 7.9% this month, a 150 bps improvement from the start of the year and returns that metric to pre-crisis level.

All in all, we think that the recent hurricanes continue to distort various data points, making the absolute interpretation of the release a challenge. For instance, prior month wage gains of 0.5% where likely influenced by demand for services associated with hurricane relief, which rolled into the 0% figure reported for this month. The y/y gain in wages of 2.4% are undoubtedly a disappointment, but as the U6 falls back towards pre-recession levels, those that believe slack remains in the labor market will have one less data point to be concerned over.

The health of the jobs market is certainly on display by the large decline in the U6 since the start of the year, which has fallen at a pace two times faster than the U3, with almost half of that decline occurring over the past two months.

In terms of the headline NFP miss, looking past the variability of the past two months, we are running at a +160,000 pace over a three-month period, close to the +175,000 since the start of the year and well above the +140,000 estimate needed to maintain and/or continue to compress the unemployment rate.

We do not think this report will or should alter

the view that the Fed will hike rates again at its next meeting. It also does nothing to dispel the markets longer-term concerns over the inflation conundrum, so will not alter the low rate hike expectations for 2018. Markets are little changed on the report, with yields slightly lower since the report, the USD stable against the major and stocks mostly flat.

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