AMERIPRISE FINANCIAL, INC.
On the Heels of Steady Job Gains: Will the Fed Make a Move Come September?
08/10/2015 | David Joy
The July payroll report was strong enough to raise the odds of a September Fed rate increase above 50 percent. The report was the first of two that the Federal Open Markets Committee (FOMC) will see before it meets next month and showed a continuation of steady job gains, but little in terms of wage gains. One particular bright spot in the report was the increase in the length of the average work week by 0.1 hours. While that may not sound like much, it is the equivalent of several hundred thousand additional jobs in terms of income generation.
Although the 215,000 jobs created were slightly below expectations of 225,000, revisions to the two prior months (totaling 14,000) made up the shortfall. Year-to-date the U.S. economy has now generated an average of 211,000 new non-farm jobs per month, including an average of 235,000 over the past three months. The unemployment rate has fallen from 5.6 percent last December to 5.3 percent, the same as in June. The underemployment rate fell to 10.4 percent from 10.5 percent in July and down from 11.2 in December. This rate was as high as 17.1 percent in 2009.
However, while the overall unemployment rate may be approaching long-term natural rate, the underemployment rate still seems to suggest the existence of some enduring slack in the labor market. At the peak of the last cycle underemployment hovered near 8.0 percent while unemployment dipped as low as 4.4 percent.
Despite the steady job gains, wage growth has remained frustratingly sluggish, at 2.1 percent year-over-year. This news comes a week after the wage component of the broader Employment Cost Index grew at the slowest pace ever at just 0.2 percent in the second quarter (with data going back to the 1980s). This suggests that inflationary pressure from rising labor costs is still beyond the horizon. The year-over-year increase in the Personal Consumption Expenditures deflator, the Fed's preferred inflation gauge, showed an increase of just 1.3 percent in June, well below the Fed's 2.0 percent target. However, the rate of increase over just the past five months has averaged closer to 1.8 percent.
Fed to Keep a Close eye on Next Month's Data
There remains more than a full month's worth of data yet to see before the Fed meets in September, and an unexpected deterioration in the strength of that data could convince the Fed to wait. But the July labor report likely reinforced the view of those FOMC members inclined to raise rates at the next meeting. Last week, Atlanta Fed president and FOMC member Lockhart told the Wall Street Journal that it would take, "A significant deterioration in the economic picture for me to be disinclined to move ahead."
There is a general sense that the Fed wants to get the first rate increase out of the way. Of course, they won't raise just for the sake of raising them. But, if a strong enough argument can be made that a rate increase is justified based upon progress in the economy, particularly in the areas of employment and prices, then September is certainly on the radar screen.
Treasury Yields and the Dollar
The yield on the two-year U.S. Treasury note rose fractionally on Friday following the jobs report, ending the week at 0.72 percent. After the weak first quarter, the two-year yield had been trading near 0.50 percent, but since mid-April it has trended higher, rising to its high for the year last week. At the same time, the ten-year yield peaked in mid-June at 2.48 percent and has drifted lower since, closing last week at 2.17 percent.
The flattening of this yield curve suggests little belief that the economy is particularly robust, or in any danger of rising inflationary pressure, despite the growing expectation of rising short-term interest rates. The dollar showed little reaction to the jobs report, but had been rising steadily since late June on evidence of the improving economic backdrop. The DXY dollar index now sits just 3 percent below its cycle peak reached in March.
On balance, it seems as though a defensible argument can be made on either side of the question whether to raise rates in September or wait a little longer. But regardless of when the first rate increase occurs, the Fed insists that the pace of subsequent increases will be slow, in recognition of the still somewhat fragile recovery. Having shouldered much of the policy burden for nurturing the recovery, the Fed will be careful not to risk undoing what progress has been achieved. Mistakes can be made, but expect the Fed to err on the side of caution when it comes to the trajectory of policy normalization.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
08/10/2015 | David Joy
The July payroll report was strong enough to raise the odds of a September Fed rate increase above 50 percent. The report was the first of two that the Federal Open Markets Committee (FOMC) will see before it meets next month and showed a continuation of steady job gains, but little in terms of wage gains. One particular bright spot in the report was the increase in the length of the average work week by 0.1 hours. While that may not sound like much, it is the equivalent of several hundred thousand additional jobs in terms of income generation.
Although the 215,000 jobs created were slightly below expectations of 225,000, revisions to the two prior months (totaling 14,000) made up the shortfall. Year-to-date the U.S. economy has now generated an average of 211,000 new non-farm jobs per month, including an average of 235,000 over the past three months. The unemployment rate has fallen from 5.6 percent last December to 5.3 percent, the same as in June. The underemployment rate fell to 10.4 percent from 10.5 percent in July and down from 11.2 in December. This rate was as high as 17.1 percent in 2009.
However, while the overall unemployment rate may be approaching long-term natural rate, the underemployment rate still seems to suggest the existence of some enduring slack in the labor market. At the peak of the last cycle underemployment hovered near 8.0 percent while unemployment dipped as low as 4.4 percent.
Despite the steady job gains, wage growth has remained frustratingly sluggish, at 2.1 percent year-over-year. This news comes a week after the wage component of the broader Employment Cost Index grew at the slowest pace ever at just 0.2 percent in the second quarter (with data going back to the 1980s). This suggests that inflationary pressure from rising labor costs is still beyond the horizon. The year-over-year increase in the Personal Consumption Expenditures deflator, the Fed's preferred inflation gauge, showed an increase of just 1.3 percent in June, well below the Fed's 2.0 percent target. However, the rate of increase over just the past five months has averaged closer to 1.8 percent.
Fed to Keep a Close eye on Next Month's Data
There remains more than a full month's worth of data yet to see before the Fed meets in September, and an unexpected deterioration in the strength of that data could convince the Fed to wait. But the July labor report likely reinforced the view of those FOMC members inclined to raise rates at the next meeting. Last week, Atlanta Fed president and FOMC member Lockhart told the Wall Street Journal that it would take, "A significant deterioration in the economic picture for me to be disinclined to move ahead."
There is a general sense that the Fed wants to get the first rate increase out of the way. Of course, they won't raise just for the sake of raising them. But, if a strong enough argument can be made that a rate increase is justified based upon progress in the economy, particularly in the areas of employment and prices, then September is certainly on the radar screen.
Treasury Yields and the Dollar
The yield on the two-year U.S. Treasury note rose fractionally on Friday following the jobs report, ending the week at 0.72 percent. After the weak first quarter, the two-year yield had been trading near 0.50 percent, but since mid-April it has trended higher, rising to its high for the year last week. At the same time, the ten-year yield peaked in mid-June at 2.48 percent and has drifted lower since, closing last week at 2.17 percent.
The flattening of this yield curve suggests little belief that the economy is particularly robust, or in any danger of rising inflationary pressure, despite the growing expectation of rising short-term interest rates. The dollar showed little reaction to the jobs report, but had been rising steadily since late June on evidence of the improving economic backdrop. The DXY dollar index now sits just 3 percent below its cycle peak reached in March.
On balance, it seems as though a defensible argument can be made on either side of the question whether to raise rates in September or wait a little longer. But regardless of when the first rate increase occurs, the Fed insists that the pace of subsequent increases will be slow, in recognition of the still somewhat fragile recovery. Having shouldered much of the policy burden for nurturing the recovery, the Fed will be careful not to risk undoing what progress has been achieved. Mistakes can be made, but expect the Fed to err on the side of caution when it comes to the trajectory of policy normalization.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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