Updated with additional report details, market reaction, and analyst commentary
The U.S. job market was alive and kicking in August, giving the Federal Reserve a strong reason for pursuing a tighter monetary policy as inflation remain well out of the bounds of the central bank's target.
NFP Numbers that Matters
A Bureau of Labor Statistics (BLS) report released Friday showed that the economy added 162K jobs in August following a 21,000 addition(revised up from a 23,000 contraction) in the previous month. Economists had braced for a non-farm payroll expansion of 55K.
Revisions to June and July numbers increased the payrolls growth by a combined 55,000.
BLS' report showed that the unemployment rate remained unchanged at 4.1%, aligning with expectations. The U6 unemployment rate, the broadest measure of labor-market underutilization, was at 61.6%, edging up from 61.4% in the previous month.
The average hourly earnings, the inflation measure of the report, rose 0.3% month over month (MoM), with the growth accelerating from July's upwardly revised 0.2%. The consensus was for a 0.3% monthly rise.
The annual increase was 3.1% versus July 3.2% and the 3% consensus.
The labor force participation rate edged up to 61.6% in August, but is down by 0.5 points since January.
Job Growth by Industries
The NFP payrolls gains of 127,000 far exceeded the numbers thrown up by ADP earlier this week. ADP's report released Wednesday showed the private sector added merely 38,000 jobs in August, the weakest gain since January.
In the private sector, payroll gains were the strongest in leisure & hospitality (+62K), healthcare & social assistance (+28,400), construction (+22K) and manufacturing (+16K).
Government jobs were also a source of strength, up 35K as opposed to a loss of 50K jobs in July.
Waller Flipped September Rate-Hike Odds But NFP Alters the Picture
After Federal Reserve Chair Kevin Warsh delivered a hawkish surprise at Jackson Hole in late August, the odds of a quarter-point hike at the September meeting rose to 66%. It took another Fed officials to provide the anti-dote.
In his speech, Waller said the labor market is "stable" and in "satisfactory shape" and employment is near its maximum sustainable level, making employment data less important to his immediate policy decision than inflation.
More importantly, Waller highlighted a substantial improvement in the recent inflation trend. Three-month core inflation through July was 3.05%, down from 4.76% in February. He said continued progress toward the Fed's 2% goal would make him comfortable holding rates, while a hot August inflation reading could push him toward a hike.
With the August NFP report coming in stronger than expected, the Fed is likely to be in a dilemma. The August consumer price inflation (CPI) report is likely to be the final piece of jigsaw puzzle that could render clarity regarding the rate trajectory.
Economists React
Following the NFP data, Northlight Asset Management Chief Investment Officer Chris Zaccarelli said there are plenty of reasons for the Fed to raise interest rates despite the typicality of the central bank staying pat with an election ahead.
“We will be watching to see if the stock market shakes this off and rallies into the close before the long weekend, because that will indicate the optimism around the AI build-out – and extremely strong corporate earnings – are the most important factors, and Fed rate changes are less important for investor psychology.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said the stronger-than-expected August payrolls report puts the Federal Reserve’s focus squarely back on inflation. He said the September rate decision remains finely balanced, with next week’s CPI and PPI reports likely to determine whether policymakers hike or hold.
Adams noted that job gains were broad-based, while more than half a million workers entered the labor force, helping the participation rate recover. The U-6 unemployment and underemployment rate also fell to 7.7% from 7.9%, signaling improving conditions for jobseekers. Although wage growth eased to 3.1%, Adams warned that continued job growth could tighten the labor market and eventually put upward pressure on wages.
How Markets Reacted to Aug. NFP Report
The stronger-than-expected jobs report has lifted the odds of a September rate hike to 58.1%, up from below 50% before the release.
U.S. Treasuries sold off broadly, pushing yields higher across the curve. The benchmark 10-year Treasury yield briefly climbed above the psychologically important 4.80% level in the knee-jerk reaction before pulling back below it. The more rate-sensitive 2-year Treasury yield rose to a fresh 52-week high of 4.404% before easing slightly.
The U.S. dollar’s recovery ahead of the report also extended, with the U.S. Dollar Index (DXY) climbing as high as 99.39.
Index futures reversed course following the data. E-mini S&P 500 futures (ES) fell 0.23%, while Nasdaq E-mini futures (NQ) gave back most of their pre-NFP gains and traded nearly flat.
