The roles report is anticipated to run sizzling, which might result in an aggressive Fed

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

Spencer Platt | Getty Images

August job growth is likely to have slowed from the rapid pace seen in July, but is still expected to have been fairly strong, with broad-based hiring across many sectors.

Monthly jobs data is always important, but the August report, due out Friday at 8:30 a.m. ET, is especially important as the state of the labor market will be a key consideration in the Federal Reserve’s next rate decision later this month .

According to Dow Jones, the economy is likely to have added 318,000 jobs in August, down from the surprisingly strong 528,000 in July. The unemployment rate is expected to remain stable at 3.5%, while average hourly wages are expected to rise 0.4%, or 5.3% on an annualized basis.

“The view of market participants is that the jobs report is more important than the CPI inflation report in determining whether a 75 basis point hike or more in September is more appropriate than a 50 basis point hike and I think that is the correct view” , he told Michael Gapen, chief US economist at Bank of America.

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

Stocks sold off this week ahead of the Nonfarm Payrolls report on concerns over inflation and rising interest rates. Strategists say the job report could be perceived as a bad news is good news type report. A strong read could trigger further selling and a rise in bond yields as investors anticipate it will make the Fed more aggressive in raising rates.

“A weak read will lead to a rally in bonds,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “It’s going to cause dollar weakness and that’s going to give us a relief rally in stocks, but I don’t know how long that will last because buying stocks in the middle of a recession wasn’t a great strategy, I think for some will.” it may be a recession and for others it may not be.”

Fed Chair Jerome Powell spooked the market last week when he stressed that the Fed is committed to fighting inflation with higher interest rates and has no plans to back down. Many market pros expected the Fed to reverse some of its rate hikes over the next year.

Powell used his Jackson Hole speech to bluntly warn that the economy and job market are likely to feel “pain” as the Fed uses rate hikes to bring inflation under control. Investors have been debating whether the Fed will use its September meeting to fire a third three-quarter-point hike or cut to half a percentage point.

On Wednesday, Cleveland Fed President Loretta Mester, a voting member of the Fed’s Policy Setting Committee, said the central bank must raise interest rates above 4% and hold them there by early 2023.

Fed focus

“The labor market situation has been a focus for the Fed,” said Diane Swonk, chief economist at KPMG. “It’s one thing to say unemployment is unsustainably low and it’s another to say we’re going to increase unemployment. They mean the same thing… Pain in the labor market increases unemployment.”

Swonk said the August jobs report carries a lot of weight, but it’s the one 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, making it some of the biggest revisions,” she said. “That number is likely to be revised heavily. It’s a number to take with a little salt.”

Swonk said small business hiring is likely to be more affected by the pinch of inflation and higher rates than the larger employers. She expects there could be some level of labor ‘hoarding’ as companies hold on to workers rather than lay them off due to difficulties in finding labour.

The leisure and hospitality sectors, for example, may not experience the usual end of the summer downturn as businesses are already understaffed by the start of the summer holiday season, she added.

Negative until early next year

Both Swonk and Gapen expect the job market to post negative monthly numbers early next year as Fed tightening weighs on the job market.

Nevertheless, the labor market has remained surprisingly robust so far. The Bureau of Labor Statistics this week reported a staggering 11.2 million job openings in July, a million more than expected.

Tom Gimbel, founder of LaSalle Networks, a recruitment firm, said he doesn’t see any real slowdown in the tech sector despite high-profile announcements of layoffs.

“We’re seeing a big upsurge in technology…it’s still growing. The largest numbers tend to be in cybersecurity. I see a 20% increase in job openings year over year,” he said. “I see a 15% increase in project management. Companies are still doing special projects in technology.” He said sales jobs are also up 10% since last year.

“We just heard the message from Jackson Hole again, the Fed means business and we’re going to get inflation under control. The job market is clearly out of whack,” Gapen said. “The stronger it is across the board, the more Fed tightening it will bring.”

Comments are closed.