Investing.com - With most of the headline readings in the March employment report released on Friday missing consensus, the highly-watched uptick in wage inflation, matching forecasts, was insufficient to cause undue concern over a more aggressive policy tightening this year by the Federal Reserve.
According to the government report, the American economy created only 103,000 jobs in March, its lowest level in six months and well below the forecast for the creation of 193,000 posts.
Furthermore, the jobless rate held steady at 4.1%, once again disappointing expectations for a drop to 4.0%.
With the U.S. generally considered by experts to be at or near full employment, markets have been focusing on the increase in wages as the Fed looks for evidence of diminishing slack in the labor market and upward pressure on inflation.
March’s jobs report did confirm a slight uptick in wage growth with a 0.3% rise from the previous month and a higher 2.7% advance year-on-year.
The Federal Reserve’s most recent summary of economic projections released in March showed policymakers had forecast that they would raise rates a total of three times this year.
However, markets have been grappling with the idea from some of the Fed’s more hawkish members that the central bank could go so far as to hike a total of four times.
Indeed, former Fed chair Janet Yellen said earlier this week that she felt three to four rate hikes this year would be likely, leaving the door open to a slightly more aggressive policy tightening.
Markets unconvinced of 4th hike in 2018
Regardless, markets, while distracted by the constant back and forth between China and the U.S. over trade tariffs, interpreted the jobs report to mean that a fourth hike by the Fed this year was less likely.
Having digested the data and while under the thumb of trade tensions, overall markets have lowered their expectations for the pace of rate hikes this year. Fed fund futures still priced in that the U.S. central bank will make its next move higher in June, although odds were last at 80.6% compared to 85.6% a week earlier, according to Investing.com’s Fed Rate Monitor Tool.
The probability of a third and final hike in December also remained above the 50% threshold. However, the odds for fourth hike by the end of the year dropped to 26.1% from 32.1% seven days ago in a clear indication that markets are more skeptical over the possibility.
Factors on the horizon
Nonetheless, in a note following the employment report, ING economists warned that upcoming data could change that tune, insisting that the better U.S. wage growth seen on Friday only served to bolster the case for four rate hikes.
“With core inflation set to reach the 2% level again in data released next week, we expect the Fed to raise rates a further three times this year – although of course, policymakers will also have a firm eye on escalating global trade tensions,” these experts said.
In any case, markets will likely pay close attention to remarks from Janet Yellen’s replacement. Current Fed chairman Jerome Powell is scheduled to speak about the economic outlook at the Economic Club of Chicago on Friday at 1:30PM ET (17:30GMT).
Powell is widely expected to repeat his call that there are no signs of runaway inflation and that a gradual pace of rate increases is appropriate.