Prior Week Summary
The Labor Department reported on Friday that the economy added a lackluster 151,000 jobs in August, following a robust upwardly revised 275,000 gain in July. Economists surveyed by Bloomberg prior to the release had been expecting a gain of nearly 180,000 jobs in the period. On a rolling six month basis, the economy is currently adding approximately 175k jobs per month, down from the nearly 230k average that stood at the end of the first quarter of this year and the 260k average that existed when the Fed last raised the target rate in December. Even still, the monthly gain was sufficient to keep the headline unemployment rate, which is calculated separately, steady at 4.9%.
In fact, when viewed in the context of the post-crisis employment environment, statistics related to unemployment and underemployment have largely been stagnant for the past year. Specifically, the headline unemployment rate has been relatively unchanged over the last year while underemployment has declined by roughly 0.6% in the same time frame.
The market appears to have initially interpreted the latest weakness in employment as a signal the Fed will need to delay the next rate hike, but those market gains were largely retraced into the close on Friday. Using the 2-yr Treasury note as a proxy for short-term rate expectations, yields fell nearly 5 basis points in the moments following the employment report before ending the day 2 basis points higher in yield. The quick shift in market sentiment, which was echoed across most asset classes on Friday, likely reflects the market’s collective confusion about which benchmarks the Fed will use in their economic assessment going forward. Given that the Fed has made a relatively strong case for the need to hike rates in the short-run while inflation expectations and labor market slack continue to run below target, clarity on this point may ultimately prove difficult.
The Look Forward
There is a very light data calendar upcoming on this holiday shortened Labor Day week, as traders mark time to the September Fed meeting. This week, the highlight will be the release of the Fed’s Beige Book on Wednesday. There are also a number of Fed members scheduled to speak on the state of the economy during the week, which may drive markets in the interim.