Investing.com – A string of solid data in the July employment report released on Friday may set the stage for the markets to come around to the Federal Reserve’s (Fed) current outlook that it will raise interest rates at least one more time before the end of the year.
The U.S. economy created 209,000 jobs in July, smashing through expectations for just 183,000 positions, while logging 82 straight months of job creation in what is a record spell of growth for employment.
The unemployment rate ticked back down to 4.3% last month, matching May’s reading as the lowest level in 16 years.
Furthermore, wage inflation matched expectations by ticking up to 0.3% growth from the prior month’s reading of a 0.2% increase, while the annualized reading of average hourly earnings surprised by holding steady at 2.5% when economists had expected a slight drop to 2.4%.
Additionally, the participation rate, which measures the number of people looking for work, also gave an encouraging sign with an uptick to 62.9% from the prior 62.8%.
Allianz chief economic economist Mohamed El-Erian said that the report “confirms that the U.S. is a world leader in employment creation” and noted that the job creation was “particularly impressive at this stage of the cycle”.
Higher inflation needed to shift market outlook on Fed hikes
“This is a positive story, but one month of stronger wage growth is not going to sway the market in terms of its thinking for Fed policy,” ING economists wrote after the report.
Markets have been reluctant to accept the Fed’s forecast that it will hike rates by the end of the year. After the report, the odds of a 25 basis point hike in December did just barely pass the 50% threshold.
However, ING pointed to inflation figures due out next week, with the producer price index (PPI) and the consumer price index (CPI) both expected to increase, as being necessary to able to shift markets outlook closer to the Fed camp.
“This combination of stronger wage, producer and consumer price inflation could nudge the market into thinking that its pricing of only one rate rise over the next 18 months may be too cautious,” these experts said.
“With the activity backdrop looking reasonable and the economy adding jobs in significant numbers we are looking for a December Fed rate hike followed by two further moves next year,” they concluded.
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