Sept Fed hike still on the cards, but strong activity data needed

The April employment report was broadly in line with Street expectations. Total payrolls increased by 223k and the unemployment rate dropped by 0.1% to 5.4%, both in line with the consensus forecast. 

"The cumulative revision of -39k and the weaker-than-expected earnings growth were modestly disappointing, but the data did not change our overall view of the labor market or our outlook for the Fed. We are seeing steady progress on the unemployment rate and expect the labor market to reach the Fed's definition of full-employment in the second half of the year." - said Societe Generale

Wage evidence is still mixed, but given the significant uptick in the ECI wage and salary component in Q1, wage pressures will soon begin to show up in the monthly data as well. Therefore, the labor market is unlikely to be an obstacle to raising rate; the hurdle lies squarely on the activity side. 

Without an eventual pickup in output gains, the current pace of employment growth cannot be sustained. This raises the stakes for next week's retail sales report which will represent a critical test for the economy.