Fed: The NFP, and the Greek Question

Published on July 2, 2015

A cleaner, clearer Non-Farm Payrolls number would have been a nice to have in front of the Fourth of July weekend, especially with the overhang of uncertainty in the ongoing Greek drama. Data releases are rarely so cooperative however, and this one was no exception.

Two points to make on a Thursday morning before a much prized three day weekend:

*** First, we doubt the mixed results of the jobs numbers are a game changer for the Federal Open Market Committee, as its own expectations going into the print were not nearly as elevated as the markets. We suspect the noise of a single data point will be stripped out to discern an underlying employment trend that, in the context of the other recent healthy looking data like retail sales, consumer confidence or housing and the like, will still keep the base case scenario for a September first rate hike in place. ***

*** Second, in any case, it is probably the European crisis that looms larger as a near term downside risk than the fine tuning adjustments to the US jobs data. On that, it is important to note that Fed officials will distinguish between the reality versus the risk of a contagion spillover into the US growth story. And for now, and it is our expectation, the latter scenario is far more likely and that the spillover of Greece into Europe and intruding into the US growth narrative remains limited. ***

The NFP Impact

The 223,000 net new jobs in June were largely in line in expectations and underscores the still steady gains in the employment outlook. The revisions to prior months were in the wrong direction, it must be said, especially when coupled with the drop in the labor participation rate that pushed the headline unemployment rate lower to 5.3% — meaning the lower headline rate is for the wrong reasons.

Making the data feel a bit worse, the flat Average Hourly Earnings for a drift back to a 2% annualized pace were equally disheartening, especially after the previous two months saw all these data points moving in the desired direction.

But it is important to note that while cleaner data is always more pleasing, such fluctuations over earnings or the entry of the part time, discouraged or longer term unemployed is already built into the forecast assumptions. It is not until around this time next year a cleaner and unmistakable tightening in the labor market is expected that, in turn, is projected to set in motion the broader based wage growth pushing up on core inflation.

In that sense, if that were to look to be already getting underway now, rather than later, it would invariably alter the Fed’s current assumed path and even put its preferred gradual pace of rate hikes at risk. So be careful what you wish for.

Beware the Greeks

As to the Greece risk, our sense is that a breakdown in the European negotiations in the wake of Sunday’s referendum and a lurch towards a Greek exit from the Euro would almost invariably force the Fed to delay a September first rate hike.

The transmission of the shocks into a potentially renewed run in a stronger dollar, for instance, would alter the US inflation outlook next year removing the need to get well in front to higher core inflation, while safe haven inflows into US treasuries could flatten the curve so much it would raise the specter of a hard to overcome repeat of the conundrum effect, even if the Fed wanted to tighten US conditions.

But a lingering threat of a European crisis is highly unlikely to derail the Fed’s intended path towards policy normalization, assuming of course, the US data continues in line with current projections. Whether it is Greece today, or another country in crisis tomorrow — take your pick — Europe’s travails in working out its multiple structural issues will be an ongoing background risk point for years to come in the Fed’s policy calculations.

And in that sense, the FOMC will be extremely reluctant to allow those issues to dictate its policy decisions, nor for that matter, to allow concerns over how a US rate hike might deepen troubles in Europe to be a driving factor to its policy decisions.

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