Investing.com — Wall Street’s focus on Friday was squarely on the August jobs report, which came in significantly better than expected. With the data suggesting a resilient labor market and inflation remaining stubbornly high, traders reacted by adding to their expectations of a Federal Reserve interest rate hike later this month.
According to the U.S. Bureau of Labor Statistics, total nonfarm payrolls increased by 162k in August, significantly higher than the anticipated 55k figure. The unemployment rate remained unchanged at 4.1%. Meanwhile, total nonfarm payrolls for June and July were a combined 55k higher than previously reported.
The jobs report comes at a time when interest rates are under close scrutiny amid a complicated environment for the Fed. The central bank’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, has remained above its long-term target of 2% for 65 straight months, leading to ructions within the Federal Open Market Committee (FOMC) over the future path of monetary policy.
A combination of a resilient labor market and stubbornly high inflation hints at an overheating economy besieged by price pressures, and in such a scenario a central bank typically considers tightening policy. President Donald Trump touted the jobs report and instead called on the Fed to lower interest rates, threatening to stop trading with countries with a U.S. surplus otherwise.
The spotlight is now on the August U.S. consumer price index (CPI) and producer price index (PPI) reports next week, which could potentially move the Fed decisively towards hiking rates or holding them steady.
The increase in rate hike expectations weighed on U.S. stocks and Treasury bonds. Here are some popular exchange-traded funds that track the benchmark S&P 500: SPDR S&P 500 ETF Trust, Vanguard S&P 500 ETF, and iShares Core S&P 500 ETF.
See below for various reactions to the jobs data:
Michael Feroli, chief U.S. economist at JPMorgan:
“Overall, it was a pretty good report. The spring-summer cooling in job growth turned around, labor supply took a leg up, and wage growth remained supportive of consumer spending without fanning inflation fears. We continue to expect a solid 2.75% GDP growth outcome this quarter.
Before today, Fed speakers pointed to next week’s CPI report as the decisive data point for the next FOMC meeting. That is still undoubtedly true, though if it’s a toss-up, today’s report will support the hawks.”
Charlie Ripley, senior investment strategist at Allianz Investment Management:
“Despite month-over-month figures and revisions being volatile, the monthly average of 87k payroll gains this year squares up (Fed Chair Kevin) Warsh’s view that the labor market remains stable with low growth and low turnover.
The balancing factor on the other side of the employment picture however is continued downward trend of wage growth, which has fallen to an annual low of 3.09%. When paired against inflation, real wage growth is actually negative. The nuance for Fed officials is that the consumer squeeze is already doing the work for the Fed and hiking rates into a wage squeeze poses the risk of overtightening.
While today’s labor report shifted September hike expectations sharply, the outcome is not a sure bet and additional signals that confirm inflation has peaked will make the Fed’s decision to hike even tougher at the September meeting.”
Jeffrey Roach, chief economist at LPL Financial:
“Given the strength of the payroll report, a rate hike on September 16 appears increasingly likely. Ironically, a rate hike may generate less market volatility than another meeting in which policymakers choose to stand pat.”
Stephen Evans, chief investment officer at Pave Finance:
“Given the current focus on inflation, most attention is still on CPI and PCE, despite the jobs report also containing signs of inflationary pressure, with average hourly earnings rising alongside average workweek hours.
This may point to tighter labor supply and, if employers are struggling to find suitable workers, they may have to pay more and ask existing staff to work longer hours. Wage inflation can be particularly persistent because higher pay is difficult to reverse once given.
The risk is that markets focus too heavily on the unemployment rate and not enough on the underlying labor-cost pressures. The Phillips curve trade-off between low unemployment and inflation holds true here. At around 4% unemployment, we may be approaching the point where a tight labor market starts to generate more persistent wage and price pressures. This, in turn, could make it harder for the Fed to cut rates, and even lead to rate hikes if the trend progresses.”
Renaissance Macro Research:
“Given the growth in labor incomes, it is unwise to simply assume that inflation will cool to target. The Fed should and will hike in September. The labor market is a much different place than it was heading into the year.”
Diane Swonk, chief economist at KPMG U.S.:
“One month does not a trend make but the report suggests that the supply of workers was more limiting than demand this spring and that the labor market is on even firmer footing than the Fed assumed. That means more demand and income and could seed a more persistent bout of inflation.
Markets upped their pricing for a September rate hike in the wake of the report. The hawks still need to move their wait and see colleagues and the political pressure to stand pat or cut has intensified. If inflation remains elevated next week, that will make it harder for the Fed to stay on hold.”
Joseph Brusuelas, principal and chief economist at RSM US:
“Looks like the Fed is likely to hike rates at its September meeting unless the August CPI surprises to the downside.”