Nonfarm payrolls jumped 528,000 last month following an upwardly revised 398,000 gain in June, Labor Department data showed Friday. The unemployment rate fell to 3.5%, matching a five-decade low. Wage growth accelerated and the labor force participation rate eased. The median estimates in a Bloomberg survey of economists called for a 250,000 payrolls gain and for the jobless rate to hold at 3.6%. Of course, the good news is bad news in these financial markets, and everything turned back to what it meant for a Federal Reserve intent on breaking the back of the worst inflation in 40 years.
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Fed Chair Jerome Powell is likely to see the latest report as a green light to stay aggressive with his interest-rate increases, including a 75-basis-point one at the next meeting in September. Everyone who submitted estimates for the Fed’s summary of economic projections forecasts unemployment reaching at least 3.9% by the end of 2024 — the median was 4.1% — and it’s likely that those estimates will be revised up in September.
“This jobs report is consistent with an inflationary boom,” said Neil Dutta, head of economics at Renaissance Macro Research. “The Fed has a lot more work to do and in an odd way, that the Fed needs to get more aggressive in pushing up rates, makes the hard-landing scenario more likely.”
Lawrence Summers now suggests that the unemployment rate may have to rise to around 4.9% to get inflation under control. He says that the job market is overheating at current levels, as exemplified by low unemployment and an unprecedented level of job vacancies.
“You’ve really got to make sure that inflation and inflation expectations have come down and are out of the system,” Kroszner, an economics professor at the University of Chicago Booth School of Business, said on Bloomberg Television. After the jobs report, he said that a 75 basis-point increase “will be on the table for the next meeting.” Odds of a 75 basis point move next month have shot up, as they should. We still get one more job to report before the September FOMC but barring a disaster, I think 75 bp then is a done deal.
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Financial markets are starting to buy into the idea of a soft landing. The S&P 500 has risen more than 13% from the low this year on June 16, yields on US Treasuries have eased back from their highs, the new issue corporate bond market is booming, and the dollar’s rally has taken a breather, for the time being. What all this means is that financial conditions are materially easier than they were just a few weeks ago, much to the chagrin of the macro doom crowd.
HSBC Bank Plc’s Max Kettner sees a painful end to this summer’s rally, and recommends abandoning equities and government bonds and hiding in cash on mounting risks to economic growth. But HSBC strategists say expectations that economic growth will stabilize and inflation will fall significantly are “wishful thinking.” “From a fundamental perspective, it’s only got worse,” they said. “Our cyclical growth indicators almost all point to significantly more downside in growth momentum.”
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