Fed Call: No rate hikes for the foreseeable future – RBS

Research Team at RBS, suggests that looking through the month-to-month volatility in the payroll changes (+11,000 in May, +287,000 in June), the underlying trend in employment growth does show some softening (over the first half of 2016, monthly job gains have averaged 154,000 versus 194,000 in 21015).

Key Quotes

“However, this slowing may reflect a lack of supply more than a lack of demand and, in any case, is not surprising to see at this point in the cycle. Moreover, even this slower pace of job growth (e.g. in the 100,000 -150,000 range) is sufficient to keep the unemployment rate coming down. Thus, the June jobs report confirmed the US economy was on fairly solid ground ahead of Brexit.

Of course, the extent to which the global economy may lose momentum post-Brexit remains unclear. Beyond Brexit, political uncertainty will persist, with US presidential elections in November, national elections required in both France (by May 2017) and Germany (by October 2017), and potential EU referendums in other nations (e.g. Sweden) as well.

In addition, monetary policy divergence (with easing now expected from the BOE, ECB and BoJ) should keep upward pressure on the dollar, which in turn will create a headwind for the US growth. So, while financial conditions have reversed much of the tightening seen in the wake of the UK vote, the economic impact of recent developments on US business investment and hiring will take much longer to ascertain. For this reason, we do not believe the odds of a September rate hike have changed meaningfully in the wake of the June jobs report (which depicts a pre-Brexit world).

We remain comfortable with our expectation that the Fed will remain on hold for the foreseeable future. In our view, while rate hikes are possible at some point, the timing is sufficiently distant (and global developments sufficiently uncertain) that we see no value in forecasting additional action at this time.”