It’s that time of the month again – all members of the investment community will be glued to whatever information window they use for tomorrow’s US jobs report. No doubt most will also have some sort of office sweepstake or other such fun and games organised around it. What’s your #NFPguess?! But at the end of the day, the question on everyone’s lips will be: When will the Fed raise rates again? This post argues that the question doesn’t really matter.

What we should really be thinking about is how we’re going to move from the current economic state of affairs to another more sustainable one. That won’t happen by the end of July. Not even by the end of the year. Probably not even by the end of the decade.

It’s true that a continued improvement in the US labour market is indeed an indicator of the US economy’s resilience in the face of the international headwinds the Fed so despises, and a number of 160,000 (the consensus estimate) or above will surely deliver the usual healthy dose of short term market volatility. Afterwards too, the usual bout of Federal Reserve rhetoric will descend on us all as various governors say things like ‘a summer rate hike would be the logical/right/welcome next step given an encouraging ‘tightening’ of the US labour market.’ We’ll almost certainly hear similar words from the matriarch Janet Yellen at that.

Despite some very mixed cues macro-wise from the US, held back by a run of poor regional manufacturing data, employment looks resilient and there are two prints within tomorrow’s jobs report that should be watched by all who see this as more than just a bit of fun: Average Hourly Earnings and the Participation Rate.

The former is looking to show that wages are rising in more or less constant percentage terms, which suggests employees’ purchasing power is increasing. This is deemed supportive of the Fed’s raising rates. While the Participation Rate is seen getting better short term, it’s struggling to break out of a 5-year downtrend. That said, anything near 62.25% will surely be keep the hawkish trend alive while a reading below 62.0% would be required to change that.

Sure, markets can handle a 25bp rate hike this summer. Firstly, it’ll only be 0.25%. Big deal. Secondly, the data is suggestive that…..markets can handle it.

But will it be June or July? Since the chances of a UK exit from the EU have increased in the time straddling end-May and early June, that becomes a potentially complicated question! If the outcome is indeed ‘leave’ then presumably the international headwinds in July would then be classified as gale force. In that case, a June US rate rise might be the better option. Or would it be better to hold off entirely?

If by tomorrow the Brexit polls have surged the other way again, it would be acceptable to predict more market undulations ahead of the vote than after it, so July would then look like the opportune time.

Of course, the third possibility is a June hike by the Fed simply to remind us all it’s capable of taking action rather than just talking about it. And let’s face it – there’s been a hell of a lot more mouth than trousers from the US central bank over the past few years!

And there’s yet another important case in point, which is actually the main point: That what happens tomorrow is absolutely insignificant when considered in terms of, well, the long term transition from too much reliance on central bank parenting to something that can foster a longer term recovery. That remains dependent on the world working together and is as such still some way off.

Augustin Eden, Research Analyst (2 June)