The Market Today

July’s Solid Labor Data Gives Fed Hawks Small Degree of Confidence

by Craig Dismuke, Dudley Carter

Today’s Calendar – July’s Solid Labor Data Gives Fed Hawks Small Degree of Confidence: The July labor market reports were solid across-the-board.  Nonfarm payrolls grew 209k during the month, beating economists’ expectations for 180k.  Private sector jobs grew 205k while government jobs increased 4k. Payroll growth by sector was somewhat encouraging with the manufacturing sector adding 16k jobs, construction adding 6k, IT adding 11k, education and health adding 54k, and business services adding 49k.  One small area of weakness was the abnormally strong rate of growth in the leisure sector, typically a lower paying sector, which added 62k jobs.  Given the solid July payroll data, the 3-month average held at 195k.  So far in 2017, payroll growth has surpassed most economists’ expectations by averaging a monthly growth rate of 184k.


In the Household report, the unemployment rate fell from 4.36% to 4.35%, just enough of a drop to bring the headline rate down from 4.4% to 4.3%.  As small of a drop as it was, the underlying pieces were mostly favorable.  The number of employed persons grew 345k while the number of people “in the labor force” rose by a solid 349k.  Combined with net population growth of 199k, this means 155k fewer people reported as “not in the labor force” than in the June report, bringing the participation rate up from 62.8% to 62.9%.  The number of people employed part-time for economic reasons, one of the Fed’s main indicators of slack, fell 44k in July.  On the negative side, the number of people employed full time fell 54k and the number of people who reported as unemployed for more than 27 weeks (“long-term unemployed”) rose 121k.


In the ever-important earnings data, average hourly earnings grew 0.3% MoM keeping the year-over-year rate at 2.5%.  Expectations were for the year-over-year rate to drop to 2.4%.  The slightly firmer wage readings were not the result of a drop in hours worked with hours holding at 34.5.  While it is far too early to say the earnings data has reversed, the stability in July’s report will be welcome news for the FOMC.


Going forward, the labor market continues to show strength in jobs growth but weaker-than-expected wage gains.  July’s report is likely to give some confidence to Fed officials who are waiting to see the labor strength translate into stronger earnings growth.  As such, this morning’s report could put a small amount of selling pressure on Treasurys as the FOMC’s aggressive path for monetary policy is slightly more justified.


Overnight Activity – Solid Payroll Report Strengthens Overnight Trend of Higher Yields, Boosts the Dollar: Markets moved cautiously overnight following a Thursday afternoon report that a U.S. grand jury had been summoned in the Russian investigation (more below) and ahead of this morning’s U.S. payroll report. Global equities moved in different directions. Sovereign yields stabilized, recovering a portion of yesterday’s drop that was spurred by the Bank of England’s less optimistic forecasts on growth and wages. After falling 8.6 bps yesterday, the 10-year U.K. Gilt yield rose 1.0 bps overnight. Before the BLS released its July labor data, Treasury yields had risen by less than a basis point across the curve. Major currencies were little changed in a quiet night for the forex market. U.S. equity futures were positive. The all-around solid nature of the payroll data could easily be seen in the initial market response. Treasury yields rose further with the 2-year yield climbing 1.6 bps to 1.36% and the 10-year yield adding 3.0 bps. Equity futures held their overnight gains and the Dollar spiked to its highest levels of the session. Fed funds futures rose with the December 2017 contract pricing in a roughly 42% chance of a rate hike.


Yesterday’s Trading Activity – Yields Fall on BoE Outlook, Special Counsel Call for Grand Jury: The Treasury curve flattened on lower yields Thursday, falling to their lowest levels in more than a month. The 2-year yield dropped 2.0 bps to 1.34% as the 5-year yield lost 3.8 bps to 1.83% and the 10-year yield closed down 5.0 bps at 2.22%; all represented the lowest yields since at least June 27. The biggest move occurred before U.S. trading opened after the Bank of England left its policy unchanged but cut its forecast for economic growth and wage gains. Yields in the U.K. dropped the most and led a global rally in sovereign debt. A softer than expected ISM non-manufacturing report (more below) didn’t help the mood. However, the second notable shift lower followed a report that Special Counsel Mueller had impaneled a grand jury in conjunction with his probe into Russia’s involvement with the U.S. election and possible ties to the Trump administration. The news also weighed on stocks but a knee-jerk sell-off faded and the Dow managed to inch out another daily gain (+0.04%) and its sixth consecutive record close. The S&P fell 0.2% while the Nasdaq lost 0.4%.


ISM Non-Manufacturing Drops off Cliff: The July ISM Non-Manufacturing index disappointed, falling from 57.4 to 53.9 (exp. 56.9). The headline index now sits at its lowest level since last August and, combined with Tuesday’s manufacturing report from ISM, points to GDP growth below 2%.  The combined composite index was pointing to GDP growth accelerating above 3%.  The business activity and new orders indices both fell close to 5 points, sharp declines for critical subcomponents of the report.  The employment index dropped 2.2 points to 53.6, adding to the risk of a downside disappointment in Friday’s BLS job reports.

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