Hawkish Fed Emboldened By Hot Jobs Number?

Weekly Market Recap Report

Equities were mixed as Friday’s Jobs Report was much higher than expected, giving the Fed room to continue hiking rates.

Last Friday’s Jobs Report showed more than 528,000 new jobs added, which was more than twice what the market was expecting and 130,000 more jobs last the previous month’s impressive number. However, there is a divergence between the Household Survey and the Establishment Survey that is difficult to explain. The Household Survey is conducted monthly by the U.S. Census Bureau by surveying households and asking people whether or not they are employed or looking for a job. The Establishment Survey is conducted by the Bureau of Labor Statistics and counts current employed (full-time & part-time) on corporate payrolls. The divergence shows basically no significant jobs added since March in the Household Survey, but $1.8 million jobs over the same timeframe in the Establishment Survey.

This divergence could also be affecting the Labor Participation Rate, which declined for the 2nd consecutive month and is at levels equal to 40 years ago.

We could be getting a false impression that the current labor market is healthy and growing. The current participation rate is equal to July of 1977. Since then, the U.S. population has increased by more than 100 million people, yet the Labor Participation Rate is the same? Meanwhile, Jobless Claims and Continued Claims are climbing to multi-month highs.

This week, we will get the July inflation numbers. The market is once again expecting inflation to have peaked.

For the past 3 months, market expectations have been exceeded as economists have predicted a peak in inflation, only to be disappointed. We have discussed on multiple occasions how CPI typically does not peak until PPI peaks. If inflation has indeed peaked, it could give the Fed room to turn dovish. However, futures expectations for rate hikes have moved to 75 basis in September versus only 50 basis points increase preceding Friday’s Jobs Report. Trading could be choppy this week and markets test current raised levels.