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The US economy added 142k jobs in August, marginally less than the 165k expected. That said, even with market attention squarely on the unemployment side of the Fed’s dual mandate, today’s data was less than conclusive ahead of the next FOMC decision on September 18th.
On the one hand, anyone looking for rates to be cut by 50bps can point to the headline payrolls undershoot, and to the -86k downward revision to the readings for June and July. Those preferring a 25bp cut later this month, however, are likely to highlight a surprise jump in wage growth, and an expected tick down in the unemployment rate.
All told we find the latter argument more compelling on balance, a position we think was broadly supported by comments from the Fed’s Williams post-release. We continue to look for 25bp at each of the Fed’s three remaining meetings this year.
The mixed messages offered by headline readings were also reflected in the details of today’s jobs report. Admittedly, the -25k revision to last month’s payrolls print leaves it looking distinctly ugly at just 89k. But most of the adjustment to prior readings was concentrated in June (-61k). August job gains, meanwhile, were centred on construction (+34k) and healthcare (+31k), even as manufacturing saw a decline of -24k, led by a fall in durable goods employment. Other sectors saw little change.
Taken as a whole, we think this offers little meaningful signal for Fed members undecided on the preferred size of policy easing this month.
Similarly, within the household survey, the unemployment rate ticked down 0.1pp to 4.2%. This, however, was something that had been widely expected by markets. July’s sharp increase in unemployment was driven by a 249k increase in temporary layoffs. This largely reversed in August, with temporary layoffs falling by 190k last month. The one notable hawkish surprise from today’s report came from average hourly earnings which rose by 0.4% last month, more than both the 0.3% consensus estimate, and the 0.2% rise recorded in July.
It was also sufficient to see average hourly earnings rise 3.8% YoY, up from 3.6% previously – a rate of pay growth we think is likely to remain uncomfortable for the Fed. Even so, we doubt a single hot data point would tip the balance of risks for FOMC voters.
All told, the lack of clarity offered by today’s data is being reflected in market pricing. Swap traders see the risk of a 50bp cut, rather than 25bps of easing later this month, as close to a coin toss and largely unchanged from pre-release levels. This dynamic has played out across FX markets too. The dollar quickly unwound a knee-jerk spike higher post-release. Given our prior view that the Fed is more likely than not to opt for a 25bp cut this month, there is little in today’s data to change our minds.
That said, barring a surprise in next week’s CPI data that shifts the needle, it looks likely that we will now be waiting until September 18th for further clarity on the path for US rates.