Fed set to hike in September

The US job report for May was strong, with 280,000 new jobs added to employment (consensus 226,000). Net revisions to March and April were also positive at 32,000. This lifts the three-month average monthly job growth just above 200,000, which likely marks the threshold for a first Fed funds rate hike in September. 

Average hourly earnings increased 0.3% m/m up from 0.1% m/m last month. This lifted the yearly rate to 2.3%, which is the highest rate since August 2013. The improvement from last month and some indication of a more clear uptrend in wage inflation is important, as it would help convince the dovish FOMC members that a 2015 rate hike is warranted. 

The unemployment rate increased one notch to 5.5% in May but the increase was due to an increase in the labour force of 397,000, while there was a gain of 272,000 in household employment. The participation rate increased a bit from 62.8% to 62.9% but overall it has been basically flat for more than six months. 

According to Danske Bank, "The bottom line is that the employment report supports our view that the Fed will hike in September. This is still earlier than currently priced into the market, although today's strong report resulted in a sell-off in US fixed income markets."