Strong Jobs Report Means Fed Is About to Crush Your Portfolio
(SeaPRwire) –
By: Raymond Vance
Most people who read Friday’s jobs report saw 162,000 new positions and thought the economy was fine. They missed the point entirely. What really matters is not how many jobs were created. It matters who got them and why the Federal Reserve now has an excuse to tighten monetary policy faster than the market priced in.
The numbers were a shock to everyone. The U.S. added 162,000 jobs in August against an expectation of just 55,000. That is nearly three times what economists forecast. July’s figure was also revised upward by 43,000, and June and July combined saw another 55,000 in positive revisions. The unemployment rate stayed flat at 4.1%. Wages rose 3.1 percent year-over-year and 0.3 percent month-over-month. But here is the part nobody is talking about. The 59,000 jobs in food services and drinking places dwarfed that sector’s typical monthly gain of 12,000. Manufacturing added 16,000. Local government education contributed 42,000, largely reversing a dip from July. Meanwhile, the information sector shed 23,000 positions. Those 23,000 white-collar and tech-related losses are not a rounding error. They are a structural signal.
Fed Chair Kevin Warsh made his hawkish posture clear at Jackson Hole last week. Three regional presidents from Cleveland, Minneapolis, and Dallas have publicly pushed for a rate hike since the July decision. The CME FedWatch tool now shows roughly a 60 percent probability of a 25-basis-point increase by the September 16-17 meeting, up from about 50 percent the day before. Governor Christopher Waller said he would favor holding steady if inflation improves. The Personal Consumption Expenditures price index has remained above the 2 percent target for 65 straight months. Treasury yields moved sharply. The 2-year note climbed 5.5 basis points to 4.389 percent and the 10-year reached 4.784 percent. Wall Street futures fell on the news. Chris Zaccarelli of Northlight Asset Management summarized it plainly. Good news is bad news when strong employment raises the risk of a rate hike.
The September 11 inflation report is where the real decision will happen. Most analysts agree the CPI data will outweigh Friday’s payroll figures. Wage growth running below the current pace of inflation, which has been pushed higher by rising oil prices, means real purchasing power is eroding. Consumers feel this before any headline number changes. If the CPI comes in hot, the Fed has no choice but to act. If it cools, the August jobs report may look like a blip rather than a trend. Either way, the message is simple. Borrowing costs are heading higher and the market is underpriced for the pain ahead.
Author bio: Raymond Vance, a senior macro-economist and consultant to central banking policy research working groups with over two decades of experience in monetary policy analysis and treasury markets.