Unexpected stall in US wage growth gets more attention than the unexpected drop in the jobless levels; reinforces Yellen views on 'high pressure' settings

By Jason Wong

The US employment report reverberated across global bond markets on Friday.

The Fed’s mandate on employment has been satisfied for some time, it’s the inflation mandate that has held the Fed back from raising rates.  On that note, the market paid more attention to the unexpected drop in wage inflation than the unexpected drop in the unemployment rate.

Some of the weakness in average hourly earnings reflected technical factors, such as the timing of the survey, but we think it is still reasonable to expect higher future wage inflation as the US economy gets closer to full employment. 

Nevertheless the data plays to the view, espoused by Fed Chair Yellen and others, that the Fed can afford to run the economy a little hotter than normal without being overly concerned about the potential inflation risks. 

The market kept a December Fed hike as fully priced, but reduced pricing for rate hikes next year, slicing about 4 bps off the OIS curve. The 2-year Treasury rate fell by 5 bps to 1.10% while the 10-year rate fell by 7 bps to 2.38%.

Lower US yields fed through into lower Germany 10-year rates (down 9 bps to 0.28%) and lower UK 10-year rates (down 12 bps to 1.38%).

Local rates rose on Friday, a reflection of prior upward pressure on global rates, but we’d expect to see a reversal of that move today.  The 2-year swap rate rose by 2 bps to 2.30%, while the 10-year rate rose by 7 bps to 3.40%.

The Fed’s Dudley speaks tonight and he will be closely watched for his interpretation of the employment report and how that might affect the prospect of future rate hikes.  The key data release will be the US ISM non-manufacturing indicators.

Jason Wong is on the BNZ Research team. All its research is available here.