The payroll data were strong enough to suggest that the Fed could hike four times this year. In truth, there were a number of caveats that show the pick-up in hiring has – so far – not been quite as firm as hoped. The warmer weather distorted construction payrolls. Moreover, some notable sectors are suffering job losses as a result of tech disruption.
However, the stock market’s reaction to the FOMC announcement on Wednesday will be key. Bonds and equities have decoupled. If the stronger profits data pushes the S&P 500 up to new highs, a fourth hike for 2017 will start to be discounted by markets. The firmer global economy could tip the Fed’s hand too.
The case for four hikes in 2017 is not predicated on any material threat to the 2% core inflation target. The core deflator may rise. Nevertheless, the impressive rise in payrolls for the tech sector reflects rapid changes in the US economy that will keep costs under control, and help propel stocks to new highs.
Summary
- Long-term inflation outlook remains benign
- Some sectors enjoying jobs boost from technology, but industries like retail remain at risk
- Larger trade deficit may anger President Trump
