Fed's Dilemma Deepens: Markets React to Mixed August Jobs Report | Episode 169 | 09-06-24

Are we on the brink of an economic slowdown, or is there still hope on the horizon? Join us as we dissect the crucial August jobs report, which has left the markets in turmoil and everyone speculating about the Federal Reserve's next move. This "Goldilocks" report revealed a mixed bag: the addition of 142,000 jobs and a slight dip in the unemployment rate to 4.2%, but with the prior two months' jobs revised down by 86,000. What does this mean for the Fed's rate cut decision? And how do rising wages and higher prices paid factor into the bigger picture?

In this episode, we explore the nuances of the report, digging into the sectors driving job creation, from construction to leisure and hospitality. We also tackle the market’s reaction, characterized by an equity sell-off and increased concerns about a slowing economy. With September's negative seasonality already taking its toll, we set the stage for the upcoming economic data and inflation reports that will precede the Fed's critical meeting. Don't miss this essential analysis that will give you a clear understanding of the current economic landscape and its implications for the future.

It's that Friday that everybody is waiting for. It's Friday, eptember 6th, and we have the August jobs report this morning. The markets are not liking this report. This is the last report that we will get ahead of the Fed's next meeting, and we're looking for confirmation of either 25 basis point rate cuts at the September meeting or possibly even 50. The report didn't really help get a whole lot of clarification. Either way, it's what we call a Goldilocks report.

It wasn't too hot to say that the Fed can't cut interest rates, and it wasn't too cold. I guess you could say where they would have to come in and be aggressive with rate cuts. Let's break down what ended up happening here. So we got. The number of jobs added was 142,000. It was slightly less than was anticipated. The softness in this, though, came from the prior two months. They were revised down by 86,000 jobs, so we're continuing to see this slowing in the labor market. Now, if you look on the other side of this, though, the unemployment rate actually ticked down a little bit down to 4.2%, so that's basically priced out the Fed having to go 50 basis points at the next meeting. We think it's probably a 25 basis point rate cut. They can do that by saying that the labor market is weakening. But it's not too too weak that they have to be aggressive.

Now here's the one part of the report nobody is talking about and this is something that we continue to talk about that is kind of taken a backseat in the Fed's mind. The Fed has made it clear that they're more worried about the labor market than they are in inflation right now. But we've had two reports this week, both the ISM Manufacturing and the ISM Services Index that both saw prices paid moving higher, and today we also saw prices paid moving higher. And today we also saw the wages moving higher. The expectation was for wages just to grow three-tenths in the month of August. They actually grew four-tenths and that took the year-over-year annual pace here in average hourly earnings from 3.6% to 3.8%. So they can't declare complete victory on this inflation side. They've got to make sure that they make note of that and they can't ignore where we are here. It's very, very dangerous to just focus specifically on the labor market and not realize what's going on on the inflation front. Now, when you look at where these jobs were created and lost and we actually got some goods producing jobs, construction jobs the main focus was in the private education and health care, as well as leisure and hospitality. So that's all we have today.

The markets are selling off on this. Today. I think that there's a bit more concern that the economy is slowing. I also think that there was a little bit too much optimism that the Fed would aggressively cut rates in September. So we're seeing the equity markets sell off on this news as well. It's been a rough week from an equity standpoint. So if the negative September seasonality is any guide for us, we're starting to get a kind of a dose of that already here this month in September. We'll be back next week with some more economic data. We'll get a kind of a dose of that already here this month in September. We'll be back next week with some more economic data. We'll get a couple more inflation prints before we get that Fed meeting the following week. Thank you very much.