JULY JOBS REPORT TALKING POINTS:
- U.S. employers add 528,000 payrolls in July, well above expectations of a gain of 250,000 jobs. The unemployment rate falls to 3.5%, as the labor market tightens
- Average hourly earnings rise 0.5% month-over-month, keeping the annual rate at 5.2%
- July U.S. inflation data will steal the spotlight next week
Updated at 9:10 am ET
MARKET REACTION TO NFP DATA
Immediately after the U.S. employment report crossed the wires, Treasury rates spiked higher on bets that the Fed will continue raising borrowing costs aggressively to cool demand and tame rampant inflationary forces.
Moves in bond yields spooked investors, prompting stocks to turn lower and erase pre-market gains. S&P 500 futures, for instance, wiped out a 0.10% advance and fell as much as 1% following the NFP release.
Traders clearly interpreted the good news on the economic front as bad news for monetary policy. Incredibly tight labor market may prevent policymakers from pivoting to a more dovish stance, an outcome Wall Street was looking for.
While strong hiring conditions may lead the Fed to press ahead with plans to front-load hikes, they should ease worries that the economy is headed off the cliff. This may help stabilize risk appetite in the near term.
S&P 500 FUTURES VS US TREASURY YIELDS
Original post at 8:40 pm ET
U.S. employers continued to hire at a robust pace at the start of the third quarter for an economy navigating challenging waters and at the late stage of the business cycle, a sign that doom and gloom predictions may be out of sync with reality.
According to the Labor Department, the economy created 528,000 nonfarm payrolls (NFP) in July, versus the 250,000 expected, following a upwardly revised increase of 398,000 in June. The unemployment rate, meanwhile, fell by one-tenth of a percent to 3.5%, matching its best levels in decades.
DAILYFX ECONOMIC CALENDAR
Although the labor market has been resilient, the rapid cooling of economic activity buckling under the weight of sky-high inflation and rising interest rates may soon take its toll, leading some firms to slow down or cancel plans to expand their workforce. Granted, hiring is likely to cool going forward, but today’s data suggests that excessive pessimism is overblown and unjustified at this time.
Elsewhere in the NFP report, average hourly earnings, a powerful inflation gauge closely tracked by the Federal Reserve, climbed 0.5% on a seasonally adjusted basis, two tenth of a percent above consensus analysts’ projections. Meanwhile, the annual rate, held steady at 5.2%, a sign that wage pressures are struggling to moderate.
While strong nominal pay growth may be a positive outcome for Americans, given the soaring cost of living, it may complicate the Fed’s efforts to restore price stability. For context, headline CPI rose 9.1% year-on-year in June, the highest level since November 1981 and more than four and a half times above the Fed’s 2% inflation target.
IMPLICATIONS FOR STOCKS
U.S. gross domestic product contracted in the first two quarters of the year, raising fears that the country is headed for a hard landing. However, good employment figures for most of the year have offset some of those concerns, with July’s figures reinforcing the sentiment that the labor market remains sturdy despite tightening financial conditions and softening demand.
If hiring holds up, personal consumption expenditures, which account for nearly 70% of GDP, could continue to drive the recovery, making it easier for the central bank to engineer a soft landing. True, the situation could change in the future, but the outlook may not be as dire as some Wall Street analysts are predicting.
In any case, July’s outstanding NFP report may give the Fed more margin to move interest rates higher by a larger amount at upcoming meetings in order to further cool demand; after all, the economy seems capable of withstanding tighter monetary policy with the labor market still firing on all cylinders. An aggressive hiking cycle may trigger a bearish rection on Wall Street, but market conditions may soon stabilize, particularly if inflationary pressures begin to ease.
We will get a better picture of the inflation profile next week, when the U.S. Bureau of Labor Statistics releases the July consumer price index. CPI is seen rising 0.3% month-over-month, which will bring the annual rate to 8.9%, down from 9.1% previously. With energy costs tumbling of late, and excess inventories putting downward pressure on many goods, the data could surprise positively, throwing the S&P 500 a lifeline to build on recent gains.