Investing.com - A solid May employment report released on Friday kept a rate hike in June on the table and ticked up bets for a third in September and a fourth at the end of the year.
Nonfarm payrolls (NFP) rose by 223,000 in May, beating forecasts for the creation of 183,000 jobs, while the unemployment rate surprised with a drop to a fresh 17-year low of 3.8%.
Market reaction got the jump on the release thanks to a tweet from U.S. President Donald Trump about an hour ahead of publication. “Looking forward to seeing the employment numbers at 8:30 this morning,” the President said.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, had been trading near intraday lows of 93.85, but quickly got a boost on Trump’s tweet to around 94.14.
Traders took the upbeat message as an indication that the numbers would be positive as the President receives the data a day ahead of the actual release.
Wage inflation picks up as markets contemplate 4 hikes in 2018
For traders, the bigger story in the employment report is wage inflation which the Federal Reserve is closely monitoring for evidence of diminishing slack in the labor market and upward pressure on inflation.
Average hourly earnings advanced 0.3% month-on-month in May, accelerating from the 0.1% increase seen a month earlier and above expectations for a 0.2% gain.
On an annualized basis, wage inflation grew 2.7% in May which, while matching consensus, still picked up from the prior 2.6% rise.
After the jobs report, Minneapolis Fed president Neel Kashkari, one of the most dovish policymakers, noted the pickup in wages but commented that he would have expected a better reading given how low unemployment is.
Yet, ING economists note that the pickup in wage inflation comes at firms find it harder to fill positions.
“The proportion of small businesses finding it hard to fill job openings continues to flirt with all-time highs, while it’s taking around twice as long to fill vacancies than it did during depths of the financial crisis,” these experts noted after the release.
“We think wage growth could test 3% again this year as these skill shortages gradually filter through to the official numbers,” they explained. Economists generally consider an increase of 3.0% or more to be consistent with rising inflation.
ING believes that a rate hike in June is highly and forecasts that the Fed will hike a further two times after that in 2018.
Markets have also priced in an increase for the June 12-13 meeting. Odds for an additional hike in September increased from 65% to 70% after the jobs report.
They still remain skeptical of a fourth hike for the year in December, when the probability priced in at only 36.8%, although the chances increased from 32.4% seen ahead of the release.