NFP: Robust hiring implies an economy going further into excess demand - RBC CM

The US official employment report showed that the economy created 304K jobs in January following a 220k gain in December. Paul Ferley, Assistant Chief Economist at RBC, points out that the solid gain in will likely temper rising market expectations of the Federal Reserve remaining on hold indefinitely.

Key Quotes:

“January payroll employment growth unexpectedly accelerated to a robust 304k which was almost double the 165k expected going into the report. The solid gain in payrolls will likely temper rising market expectations of the Fed remaining on hold indefinitely.”

“With the economy at capacity, the pace of hiring needs to drop to a pace consistent with new entrants coming into the labour market that is around one-half of the gain reported for January. The persistence of robust hiring implies an economy going even further into excess demand with a rising risk that the upward trend in wage gains will start to move into inflationary territory.”

“To ensure that this risk does not materialize, our forecast assumes modest further tightening by the Fed this year with the fed funds range rising a further 50 basis points with the upper end of the range finishing 2019 at 3.0%. However, Fed comments this week suggest that the bar has been raised as to sufficient indication of these risks materializing.”