The jobs report should be hot and that could lead to an aggressive Fed

People enter a store along a busy Manhattan shopping street on December 10, 2021 in New York City.

Spencer Platt | Getty Images

Job growth in August likely slowed from July’s blistering pace, but is still expected to have been quite strong, with widespread hiring across many sectors.

Monthly jobs data is always important, but the August report, released at 8:30 a.m. ET on Friday, is particularly important since the state of the labor market will be an important consideration in the Federal Reserve’s next decision on interest rates later this month.

The economy is expected to have added 318,000 jobs in August, less than the surprisingly strong 528,000 jobs added in July, according to Dow Jones. The unemployment rate should remain at 3.5%, while the average hourly wage should increase by 0.4%, or 5.3% on an annualized basis.

“The view from market participants is that the jobs report is more important than the CPI inflation report in determining whether a September hike of 75 basis points or more is more appropriate than up 50 basis points, and I think that’s the right view,” said Michael Gapen, chief U.S. economist at Bank of America.

The other key data central bank officials will consider at their September 20-21 meeting is the August consumer price index, released September 13. CPI should be high but below July’s 8.5% pacedue to falling gasoline prices.

Stocks sold ahead of the nonfarm payrolls report this week on concerns about inflation and rising interest rates. Strategists say the jobs report could be seen as a “bad news is good news” type of report. A high number could trigger more selling and a rise in bond yields, as investors will assume it will make the Fed more aggressive in raising interest rates.

“A low number will cause bonds to rally,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “It will lead to dollar weakness and it will give us relief in equities, but I don’t know how long it will last because buying equities in the teeth of a recession has not been a great strategy. I think so. going to be a recession for some and maybe not for others.”

Fed Chairman Jerome Powell spooked the market last week when he pointed out that the Fed was committed to fighting inflation with higher rates and was not planning to back down. Many market professionals expected the Fed to reverse some of its rate hikes next year.

Powell used his Jackson Hole speech to bluntly warn that the economy and labor market are likely to feel “pain” as the Fed uses interest rate hikes to tame inflation. Investors are wondering if the Fed will use its September meeting to trigger a third three-quarter point hike or back down to half a percentage point.

On Wednesday, Cleveland Fed Chair Loretta Mester, a voting member of the Fed’s Policy Setting Committee, said the central bank will have to raise its key rate above 4% by early 2023 and keep it there.

Focus of the Fed

“The state of the labor market has been the focus of the Fed’s concerns,” said Diane Swonk, chief economist at KPMG. “It’s one thing to say that unemployment is too low, and it’s another thing to say that we are going to increase unemployment. They mean the same thing… Pain in the labor market increases unemployment .”

Swonk said August’s jobs report held a lot of weight, but that’s the month economists expect the government’s monthly payroll data to be misleading.

“August tends to have the lowest response rate for the salary survey of any month of the year, subjecting it to some of the most significant revisions,” he said. she stated. “This figure is likely to be revised a lot. It’s a figure that you have to take with a bit of caution.”

Swonk said hiring at small businesses has likely been more affected by the pinch of inflation and higher rates than larger employers. She expects there may be some degree of labor “hoarding” as companies retain workers rather than lay them off due to difficulties in finding workers.

Leisure and hospitality, for example, may not see their usual late-summer slump as businesses were already short of staff at the start of the summer holiday season, she added.

Negative early next year

Swonk and Gapen both expect the labor market to start posting negative monthly numbers early next year as Fed tightening weighs on the labor market.

Yet the labor market remains surprisingly resilient so far. The Bureau of Labor Statistics reported this week a 11.2 million amazing job postings in July, a million more than expected.

Tom Gimbel, founder of LaSalle Networks, a staffing firm, said he doesn’t really see a slowdown despite high-profile layoff announcements in the tech sector.

“We’re seeing a big increase in technology… It’s still growing. The biggest numbers tend to be in cybersecurity. I’m seeing a 20% year-over-year increase in the number of offers for job,” he said. “I see a 15% increase in project management. Companies are still doing special projects in technology.” He said sales jobs were also up 10% from last year.

“We just heard the message again from Jackson Hole, the Fed is serious and we are going to get inflation under control. The labor market is clearly out of balance,” Gapen said. “The stronger he is across the board, the more Fed tightening he will bring.”

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