Underlying Employment Strength
Last week’s September employment report showed weakness in the headline jobs gained number but significant underlying strength in other measures. The economy lost 33,000 jobs for the month versus an expected gain of 80,000, according to a Bloomberg survey of economists. The report reflects the tough-to-predict impact of hurricanes Harvey and Irma.
The remainder of the report was very strong and may indicate that improving employment is finally represented in wage gains, which is necessary for any acceleration in inflation expectations. The unemployment rate fell from 4.4% to 4.2%, while the labor force participation rate increased from 62.9% to 63.1%. Average hourly earnings increased by 0.5% to an annual rate of 2.9%. The decrease in the unemployment rate and the increase in average hourly earnings were both better than market expectations.
The fixed income market has held up well this year due to a belief that inflation was remaining stubbornly low despite increased economic growth, falling unemployment, and an accommodative Federal Reserve. This report could start to change this paradigm. I will be watching this Friday’s Consumer Price Index for confirmation of a potential acceleration in inflation expectations. The market expects a 0.6% monthly gain for an annualized increase of 2.3%. If the report shows higher inflationary readings, I would expect bond yields to continue to rise.
I am modestly bearish on bonds now but may increase my conviction for higher yields in the coming months if we get some signs that inflationary pressures are building.
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