Following the latest labour market data, we do not change our baseline scenario of two more rate hikes this year, though latest data give some conflicting signals regarding future Federal Reserve policy.
To us, a main element is the continued progress in the labour market. The May unemployment rate reached a 16-year low, solidly below the level the Fed estimates itself that is ‘neutral’, currently projected at 4.7%. This suggests that the labour market continues to tighten faster than the Fed baseline scenario. Also, we note that further improvement in the labour market is likely to be forthcoming, with the services ISM gauge on employment rising solidly, to nearly 58, signalling a strong willingness of firms to increase hiring.
This reinforces our view that wage growth is likely to accelerate, suggesting that inflation pressures are on an upward trend. While we do not ignore other, more subdued data –weaker car sales, activity in construction – overall activity still points to an improving, but modest growth momentum, signalling 3% GDP growth this quarter.
Gero Jung - Chief Economist - Mirabaud AM
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