Payrolls surge, putting September in play
Nonfarm payrolls rose 162k last month against consensus expectations for a gain of just 55k, clearing even the most optimistic forecasts and marking a sharp reversal from July's initial -23k print.
The unemployment rate held at 4.1%, in line with expectations, while average hourly earnings rose 0.3% MoM, also matching economist predictions. Having looked for a below-consensus set of readings pre-release, this is not the outcome we had expected, and markets have responded accordingly, with Treasuries sinking and the dollar up close to half a percent this afternoon.
Taking a step back, however, we do think some caution is warranted on the composition.
The BLS attributes August's gains to food services and drinking places and to local government education, precisely the two sectors that dragged July into negative territory, when local government education shed 50k jobs and leisure and hospitality lost 40k. This, we think, looks like payback for a seasonally distorted July rather than a genuine reacceleration in hiring. Incorporating a 44k upgrade to the July payrolls figure, the average two-month payroll gain stands at around 80k, consistent with Chair Warsh's Jackson Hole characterisation of a labour market that is stable and at full employment.
As we see it, while this mix of readings doesn’t add support for higher rates, it no longer weighs against such a decision either.
With three FOMC members having already dissented in favour of a 25bp hike in July, the case for holding on September 16th now rests almost entirely on next Friday's August CPI print. Our call for the Fed to remain on hold this year is under clear pressure and, if the reading on the 11th delivers a 0.3% MoM core print, a 25bp hike to 3.75-4.00% now looks the path of least resistance.
For the dollar, this is a positive development, with the buck reacting to an acceleration in rate-hike bets this afternoon.
As we flagged in our week ahead, payrolls were always going to be the week's decisive event for the Fed call. They have not settled the debate yet, but they have tilted it firmly toward the hawks. Attention now turns to CPI in a week.