The Market Today

Slowing Job Growth but Stronger Wage Gains Present Conflicting Picture for Policymakers

by Craig Dismuke, Dudley Carter


Slowing Job Growth but Stronger Wage Gains Present Conflicting Picture for Policymakers: Job growth continues to slow, according to the August nonfarm payroll report which showed just 130k new jobs added and 20k in negative revisions to the previous two months’ tallies.  Moreover, 34k of those new jobs were in the government sector, largely the result of the temporary hiring of census workers (Federal payrolls rose 28k of which 25k were census workers).  Private-sector payrolls grew just 96k, well below estimates of 150k.  This marks the third report month in 2019 in which the private sector has added fewer than 100k jobs.  The manufacturing sector was again weak adding just 3k new jobs while the retail sector shed another 11k jobs.  While trade and the resulting economic uncertainty are likely weighing on hiring decisions, particularly in the manufacturing sector, job growth was expected to slow at this stage of the economic cycle.

On the positive side of the ledger, the average workweek rebounded from July’s weak 34.3 hours per week to 34.4 hours, now in-line with the norm during the expansion.  At the same time, average hourly earnings were up a strong 0.4% MoM, boosted by above-trend wage gains in the construction, IT, finance, utilities, transportation, business services, and education and healthcare sectors.

In the household report, the unemployment rate held at 3.7% as people re-entered the labor force (+571k) but even more people reported as employed (+590k).  The household employment numbers tend to be more volatile than the establishment survey but average out over time.  Also in the household data, the number of people working part time for economic reasons jumped 397k and those reporting as long-term unemployed rose 77k, both indicators of slack which had tightened significantly in recent reports.  This appears to be an unwinding of some of that tightening.

Bottom Line: The August labor data present a conflicting view for monetary policymakers.  There is further evidence of a slowing labor market which is partly the result of the stage of the economic cycle, but may also be partly the result of trade uncertainty weighing on hiring decisions.  However, there is some “heat” in the data, as of August at least, in wage gains.  As such, the data is likely to support the notion of adjusting policy less aggressively at their September 18 meeting.

Later Today: At 11:30 a.m. CT, Fed Chair Powell will speak on the U.S. economic outlook from Zurich. His comments will be the last officially scheduled remarks before the Fed enters the quiet period ahead of the September 18 decision.


Optimism Built Up Ahead Of U.S. Session On Trade News And ADP: After a solid ADP report added to risk-on pressure created a positive development in the U.S.-China trade saga, a stronger-than-expected ISM services survey sent equities and yields shooting higher at 9 a.m. CT. China’s Commerce Ministry released a statement during the Asian trading session saying the U.S. and China agreed to meet in Washington early next month, giving investors some hope that de-escalation was still possible. Ahead of this morning’s nonfarm payroll tally, ADP reported a stronger-than-expected estimate for private payroll growth and initial jobless claims remained low.

ISM Broke The Lid Off Equities And Yields: But U.S. assets broke higher after the ISM’s Non-manufacturing PMI jumped 2.4 points more than expected, showing the services sector recovered better than estimated in August, despite deteriorating trade conditions (more below).  The S&P 500 rallied 1.3% and, after a solid eight-day run that has included six daily gains, closed back within 1.6% of its all-time high.  The trifecta of economic-positive developments gave Treasury yields a boost as well, pushing the 2-year yield up 9.4 bps to 1.53%, the sixth-largest daily increase since 2010.  The 5-year yield rose 10.8 bps to 1.43% and the 10-year yield added 9.3 bps to 1.56%.


Sentiments Stayed Upbeat In Front Of Jobs Report: The stronger sentiment that boosted global stocks and sovereign bond yields on Thursday stuck around overnight as markets awaited the official say on how the U.S. labor market performed in August. Equities closed up again in Asia and were modestly positive across Europe, while sovereign bond yields in those regions sent more mixed signals. Longer European yields ticked lower as shorter yields in most countries inched higher. U.K. yields dropped across the curve, however, giving back a portion of the last two days’ surge. Developments this week have given markets some hope that a no-deal Brexit will be more difficult to achieve that PM Johnson believed.

China Cuts Required Bank Reserves: As they looked ahead to this morning’s payroll report, that will be followed by comments from Fed Chair Powell around the lunch hour, investors were keeping an eye on trade-related developments. An announcement yesterday that top U.S. and Chinese officials would meet in early October spurred optimism upward. Overnight, China’s central bank announced it was lowering the required reserve ratio by 0.50% for all Chinese banks starting September 16, while some other will see their requirement cut by 1.00%. The PBOC estimated that changes will introduce roughly $126B of liquidity into the Chinese economy, which could help offset economic weakness created by the trade war.

Headline Job Miss Eased Market Optimism: Around 7 a.m. CT, futures on the S&P 500 had risen 0.4% and the Treasury curve had moved up more than 4 bps inside of the 30-years. Equity futures trimmed their gains and Treasury yields pulled back to up roughly 1.0 bps on the day after headline job growth missed expectations.


Surprisingly Strong ISM Services Survey Softened The Blow Of Manufacturing Contraction: The ISM’s August Non-manufacturing PMI rose more than expected from July’s three-year low. The headline index jumped 2.4 points more than expected to 56.4, well above the neutral 50 level and third-best reading of 2019, on mixed underlying details. The employment index declined to its lowest level since March 2017, knocking 0.8 points off the headline index. However, that weakness was overwhelmed by a sharp snapback in production and new orders. The former posted its largest one-month gain since 2008 while the latter notched its strongest monthly improvement since February; both landed near the middle of last year’s range. The strength in services activity helps soften the blow of a contractionary manufacturing reading earlier this week, and widened the divergence between performance across the two sectors. The spread between the services and manufacturing PMIs was the fourth widest of the cycle.

Factors Orders Report Included Modest Revisions To Business Investment Indicators: July’s total factory orders were a bit better than expected, with overall orders up 1.4% and the core category, which excluded a large monthly gain in the volatile transportation categories, 0.3% higher. The initial estimate of core durable goods orders was unrevised at -0.4%. Looking at the implications for business investment, there were small revisions to both orders and shipments. Core capital goods orders were revised down from +0.4% to +0.2% while core shipments were notched up from -0.7% to -0.6%. On a trailing three-month basis, shipments have been weak but core business orders have firmed up, providing a glimmer of hope for a near-term turn up in investment.

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