(Reuters) - U.S. job growth increased more than expected in June as manufacturers stepped up hiring, but steady wage gains pointed to moderate inflation pressures that should keep the Federal Reserve on a path of gradual interest rate increases.

FILE PHOTO: Job seekers line up at TechFair in Los Angeles, California, U.S. March 8, 2018. REUTERS/Monica Almeida

Nonfarm payrolls increased by rose by 213,000 jobs last month, the Labor Department said on Friday. Data for April and May was revised to show 37,000 more jobs created than previously reported. The unemployment rate rose to 4.0 percent from an 18-year low of 3.8 percent in June as more people entered the labor force in the sign of confidence in the jobs market.

KEY POINTS:

* U.S. June labor force participation rate 62.9 pct, vs May 62.7 pct

* U.S. June average hourly earnings, all private workers, rose 0.2 pct, versus consensus for up 0.3 pct and May’s +0.3 pct

* U.S. June U-6 underemployment rate 7.8 pct, vs May 7.6 pct

* U.S. June private sector jobs rose 202,000, higher than consensus for up 190,000, vs May’s upwardly revised 239,000

* U.S. June government jobs +11,000, vs May +5,000

COMMENTS:

ANDREW HUNTER, U.S. ECONOMIST, CAPITAL ECONOMICS, LONDON

“The solid 213,000 gain in non-farm payrolls in June, which followed an even stronger 244,000 rise in May, illustrates that labor market conditions remain unusually strong. Together with signs that GDP growth rebounded markedly in the second quarter, that will keep the Fed on course to raise interest rates twice more by year-end.

“Admittedly, the unemployment rate did rebound to 4.0 percent, from 3.8 percent, but that was only due to a 601,000 surge in the labor force, which outweighed a more modest 102,000 rise in household employment. In any case, if jobs growth remains close to its current trend, the unemployment rate is likely to resume its downward trend over the second half of this year. Average earnings growth remains fairly subdued, with a 0.2 percent month-on-month gain leaving the annual growth rate unchanged at 2.7 percent. But an elevated share of firms are now planning to raise compensation and, in any case, core inflation already appears to be on an upward trend.”

THOMAS SIMONS, MONEY MARKET ECONOMIST, JEFFERIES, NEW YORK

“Payrolls were pretty solid overall, nothing really to poke holes at as far as the establishment data goes. 0.20 percent increase in average hourly earnings is slightly disappointing if you want to try to find some bad news in so far as that qualifies. We’re still steady at 2.7 percent year over year but 213,000 on the headline payrolls, upward revisions for last month, solid increases in manufacturing and goods producing, I think there is a lot in the establishment survey.

“On the household survey, 0.20 increase in the unemployment rate is kind of surprising, but when you look at the composition there you had almost 500,000 people coming back into the labor force unemployed. Given that we have record amount of job openings I think that isn’t the worst thing ever since there is still plenty of work available for these folks. A growing labor force is still good. I think it’s a response to tightness in the labor market. Overall I think it’s pretty good.

“Average hourly earnings are I think the number that most Treasury traders are laser focused in these employment reports that I think is why you got a little bit of an initial rally. That and of course the unemployment rate without going into the details doesn’t look great, but when you get down to it its pretty good news overall.”

ANTHONY SAGLIMBENE, GLOBAL MARKET STRATEGIST, AMERIPRISE FINANCIAL SERVICES, TROY, MICHIGAN.

“It’s a positive for the markets. The 213,00 in June is about where the average has been for the year. The average so far has been 208,000 so we’re on pace for what we’ve seen for the year. The unemployment rate kicks up a little bit as you have more people coming into the labor market. The bigger thing that the market is paying attention to is the average hourly earnings, which was 0.2 percent month-over-month, generally in line with where it’s been.

“The pace of inflation is what investors and the market are most in tune with, it’s really what’s going to play a role in corporate profitability. If you see wage inflation pressures, or the unexpected spike in average hourly earnings, that’s an indication that employers have to pay more in wages to attract more workers, which dents corporate profitability and that’s what the market is really focusing in on, and today’s number really doesn’t indicate that wage pressures are getting out of hand, that’s a positive for the market and probably respond well to that.”

BRAD MCMILLAN, CHIEF INVESTMENT OFFICER, COMMONWEALTH FINANCIAL, WALTHAM, MASS.

“On the whole, I think it is positive. Jobs growth continues to accelerate above expectation, manufacturing was terrific. All of that was expected to some extent. The real takeaway is the labor force. The available labor force seems larger than what a lot of people thought.”

“When I look at the wage growth from an economic standpoint, that plays right into this more labor supply than we thought. Clearly there is not the lack of labor that’s going to force wages higher. We see people moving into labor force, that’s a good thing from a corporate perspective because one of the worries has been rising wage growth is going to erode profit margins, but we don’t really see that yet.”

“From a market perspective, this is really a sweet-spot report -- continued economic strength without growing cost pressures.”

STEVEN ENGLANDER, HEAD OF G10 FX, AND NORTH AMERICAN MACRO STRATEGY, STANDARD CHARTERED, NEW YORK

“From the economy’s point of view this is about as good a number as you can get. I’m focusing on the payrolls number, plus the revisions -- very positive. But the somewhat higher unemployment rate, which means more participation and the somewhat weaker earnings number, makes the expansion more sustainable. Whatever worries the Fed has about overheating get mitigated. And this is subject to recognizing that this is just one number. But, on margin, say compared to having 2.9. One number. But on the margins, having a 2.9 or 2.8 on the earnings and the participation rate dropping. This is a more relaxing number for the Fed because it suggests that maybe the supply side, certainly on the labor market, is kicking in a bit.

“I think the market will see this as being very equity friendly. The dollar is coming off because there is a big focus on the earnings number and in the short-term it takes some pressure off rates. We have seen 10-year rates go down by 2 basis points. The market looks at this says this is not a particularly dollar friendly number in the very short-term, but for the economy it is a great number.

“What is nice about these numbers is that even though they are strong and market friendly, they are not so out of bounds that you think this is going to have to be reversed next month.”

JJ KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO

“It was what the market wanted to see: more jobs created than expected, wage growth moderate and creating jobs where you want to see them ... it’s not just creating jobs its creating careers.”

“The retail number may be a little surprising. It’s odd given the timing.”

MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIF

“While sluggish wage growth counter what would otherwise have been a uniformly strong jobs report, the data will reinforce in the short-term the baseline view of a strong U.S. economy that outpaces others, is able to navigate trade policy uncertainty, and will encourage the Fed to hike at least once more this year.”

MARKET REACTION:

STOCKS: S&P e-mini futures, were little changed, reversing slight losses before the report and were last up 0.05 percent

BONDS: Treasury yields slipped further, 2-year notes were at 2.5406 percent and 10-year at 2.8199 percent

FOREX: The dollar index extended slight losses and was last down 0.44 percent