The July jobs report is out this morning but before diving into those numbers we’ll give our two cents on the FOMC rate decision and the confusing Powell presser. The post-meeting statement hit all the dovish expectations with this sentence: “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2.25%.” That pretty clearly established the reaction function for this rate cut. As for future actions they provided this nugget: “In determining the timing and size of future adjustments to the target range for the federal funds rate the Committee will assess realized and expected economic conditions...This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” That sounds like as long as inflation remains docile, global uncertainties remain, and domestic indicators stay near current levels, additional cuts are likely. It wasn’t until the presser that Chair Powell muddied the message with his “mid-cycle adjustment’ comment. That led to renewed dollar strength and a decrease in inflation expectations, exactly the opposite of what the Fed wanted off its first rate cut in more than a decade. As the committee carefully weighs every word in its statement, we consider that more definitive than the more off-the-cuff remarks of Powell. In addition, with the Trump announcement of 10% tariffs on $300 billion of new Chinese imports yesterday, fed funds futures returned to expecting two additional rate cuts this year. Such is the power of global uncertainties. Now on to the jobs report.
For the month, 164,000 jobs were created essentially matching the 165,000 forecast but that represents a dip from the downwardly revised June report of 193,000 (initially reported at 224,000). In fact, the prior two months were revised down 41,000 trimming some of the positives from the prior two months. Over the past year, monthly job gains have averaged 192,000 so the July results reflect a sequential drop versus June and also a miss versus the annual average.
Away from the headline job growth numbers, wage gains had a good month both on a month-over-month and year-over-year basis. Average hourly earnings rose 0.3% for the month versus 0.2% expected, while year-over-year earnings rose a tenth to 3.2%, beating the 3.1% forecast. Even with the slight one-tenth uptick in July wage gains appear to be plateauing versus moving materially higher on the increased job gains. February’s 3.4% YoY gain remains the high for this cycle. As long as wages remain stuck in the low-3% YoY level, demand-pull inflation is unlikely to accelerate and that signals inflation should remain quiet enough to allow additional rate cuts given the Fed’s latest reaction function.
Missing the pre-release forecast the unemployment rate remained at 3.7% (actually 3.712% vs. 3.666% in June). Expectations had it dipping back to 3.6% after the one-tenth increase in June. The Household Survey—which is used to generate the various employment ratios— saw an 88,000 person increase in the ranks of the unemployed (6.063 million versus 5.975 million) and a large increase of 370,000 persons to the labor force denominator (163,351 million vs. 162,981 million). The combination of more unemployed persons and a larger labor force led to a 5bps increase in the unemployment rate but that kept the rounded result unchanged from June.
Meanwhile the broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) dipped to 7.0% after a brief uptick to 7.2% in June. 7.0% represents a new cycle low. As mentioned, unemployed persons increased by 88,000, but part-time workers decreased by a whopping 363,000 and 93,000 were subtracted from the ranks of the marginally attached (those willing to work but not actively looking). The lower numerator was met with a larger denominator as the labor force increased by 370,000 and all that led to the two-tenth decrease to 7.0%.
The labor force participation rate (labor force divided by civilian population) rose to 63.0% after resting at 62.9% for two straight months but it still remains off the cycle high of 63.2% set back in February. The one-tenth rate increase was driven by the aforementioned 370,000 increase in the labor force while the civilian population rose by a slightly smaller 188,000. While the current rate is fairly close to the cycle high, the rate still pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.2% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.
In summary, this release matched most expectations but couldn’t quite match the strength of the downwardly revised June report and the headline jobs number missed the twelve-month average. While wage gains saw one-tenth upticks for the month and year, wages seem stuck in the low-3% YoY range after increasing more forcefully earlier in the year. If that continues, it favors additional rate cuts this year. In fact, fed funds futures are forecasting a year-end funds rate of 1.63% which reflects 50bps of additional rate cuts. Thus, despite the decent jobs numbers, and the muddled Powell press conference, the market still sees two additional rate cuts by year-end. That is the power of heightened global uncertainty following talk of additional Chinese tariffs.
Inflation Projections & Dollar Heading Wrong Way for Fed
As mentioned above, the message from the Fed’s first rate cut in more than a decade was muddled by some of Chair Powell’ s comments in the post-meeting press conference. A couple reasons for the rate cut would be to stabilize inflation expectations and stem strength in the U.S. dollar and its deflationary impulse. With Powell’s comments implying the cut was merely a one-off “mid-cycle adjustment” the dollar resumed it’s strength against other currencies and inflation expectations dipped, just the opposite reaction the Fed was hoping for. Until those expectations start trending in the other direction, additional rate cuts are likely, just like the futures market is predicting.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||2.06%||-0.04%||1 Mo LIBOR||2.24%||-0.04%||FF Target Rate||2.00%-2.25%||3 Year||1.680%|
|6 Month||2.01%||-0.08%||3 Mo LIBOR||2.27%||UNCH||Prime Rate||5.25%||5 Year||1.648%|
|2 Year||1.74%||-0.13%||6 Mo LIBOR||2.21%||+0.03%||IOER||2.10%||10 Year||1.794%|
|10 Year||1.88%||-0.20%||12 MO LIBOR||2.19%||+0.01%||SOFR||2.19%|