Jobs Update Pushes Odds of a Rate Hike While Trump Calls for Cut
The chances of one or more rate hikes before the end of the year are around 87%.
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Good employment news created more uncertainty about a Fed rate hike on Friday, and the market did not like it. The S&P 500 lost 0.4%, the Magnificent Seven (MAGS) took a 1.4% hit and the DJIA was down 0.6%. However, breadth was slightly positive at 51% due to relative strength in small caps that gained 0.25%.
The August jobs report came in at 162,000 against expectations of 53,000, which is the strongest gain in the last five reports. The summer job weakness that had been driving the anti-inflation trade was revised away. July’s loss of 23,000 became a gain of 21,000 and June was revised up to 31,000. Unemployment held at 4.1% with participation rising to 61.6%. Wages grew 3.1% for the year.
That is a healthy labor market, and a healthy labor market gives the Fed room to hike into persistent inflation. Fed funds futures moved to 58% for a quarter-point hike on September 16 and to 87% for at least one hike by the end of the year. Bonds and oil held steady and didn’t have any impact on the action.
Focus Shifts to CPI
The jobs report was supposed to be the big event this week and it turned out to be a setup for an even bigger event next week. The August CPI is due Friday, September 11, with PPI on Thursday. Those are now the reports that will likely decide what the Fed does a few days later at its September meeting.
Fed member Waller boosted the market on Thursday when he said his vote would be heavily influenced by CPI. Chairman Warsh said at Jackson Hole that labor markets are stable and the numbers back him up, but he also said his concern is inflation. The strong jobs numbers remove the argument that the economy is too weak to absorb a hike, which was the main thing suppressing the odds of a rate hike.
Even if the Fed does not raise rates this month, the inflation issue will be far from resolved. Oil is at a two-month high, three central banks are leaning hawkish and the AI buildout is raising component costs faster than the suppliers can pass them through. Inflation pressures are showing few signs of easing.
Political Angle
One interesting aspect of this report is that strong jobs numbers two months before the midterm election are going to be a major talking point for the Trump administration. Trump wasted no time calling it a great report and said the Fed should lower rates rather than hike, telling the board to be patriots. The president is publicly pressing for cuts on the same day the market moved toward pricing a hike. That tension between the White House and the Fed has been out there already and is now going to intensify.
One Detail from the AI Sector
The information sector lost 23,000 jobs in August, including 8,000 in computing infrastructure, data processing and web hosting. The likely explanation is AI investment replacing headcount. The buildout is adding capital spending and subtracting jobs in the same sector, which is what happens when productivity increases start to work.
Game Plan
I remain cautious about market conditions. The inflation debate is far from over and bonds look precarious. We are in the middle of poor seasonality with a high level of uncertainty and few positives.
Friday’s action tells us that the market has decided that a strong economy is not enough to stem market concerns or bolster the stock market. I am not adding exposure into a market that sells good news, and I am not chasing the names that bounced Thursday on a comment that turned out to be one day of relief. The shopping list keeps getting longer while I wait for more news flow and further chart development.
Enjoy the holiday. I’ll see you on Tuesday.
At the time of publication, DePorre had no positions in any securities mentioned.
