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The Global Markets Weekly – 7/6/18
US Labor Market Still Not Overheating
A solid 213,000 increase in nonfarm payrolls coupled with stable wage growth at 2.7% y/y in June suggests there may still be room for a stronger economy and tax cuts to pull in more workers. The jobless rate rose 0.2 pp to 4% as over 600,000 people entered the labor force. Despite anecdotal evidence of shortages in certain skilled sectors, the bulk of jobs are lower-skilled, and lower-paid on average.
The small sample size of the household survey cautions against reading too much into any one release, but the y/y rate of growth shows some sign of pushing back above 1% y/y, a bit stronger than the sluggish pace seen throughout much of the expansion (chart).
The main takeaway is that the strong report hints at a supply side response from both business and the labor market as tax cuts take hold, allowing the Federal Reserve to maintain a measured approach to tightening monetary policy tightening as slack is a bit greater than the 4% jobless rate suggests.
DE continues to see interest rates headed higher over time, with less concern about a shallowing yield curve than in some corners of the market.
DE expects shorter and longer term interest rates in the U.S. to continue to push higher, the 10yr moving to 3.5% by year-end 2018, and 4% in 2019.
The increase in the supply side of the U.S. economy is a positive for growth and should help to hold down quicker inflation pressures, though we expect price inflation and growth to remain firmer than the Fed currently expects.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||Jun CPI (Th)
|0.3% / 0.2%
(3% / 2.9% y/y)
0.2% / 0.2%
|Headline lifts to 3% y/y, run rate on core more important. Boost from tariffs wouldn’t be the “good” kind of inflation.|
May IP (Th)
0.7% / 1.2% y/y
|Appears in Brussels at EU parliament.|
|1.8% / 1.9% y/y||Trade fears impacting activity, sentiment, and authorities’ policies.|
|Canada||Rate Decision (We)||+25/+25bps to 1.5%||Governor Poloz downplaying the impact of trade conflicts.|