Today we received the July monthly report on employment in the U.S.
Headline Job Gains
Economists were expecting the economy to add 190,000 jobs according to Bloomberg. We actually got 157,000 albeit with some upward revisions.
A miss is a miss, and I get that the market is going to react a certain way, but I literally think this means nothing. There is way too much evidence that the labor market remains tight, and business confidence remains way too strong for there to suddenly be a trend of weaker hiring. This is noise and nothing more.
At this stage in the expansion, anything between 160,000 and 250,000 should be interpreted as just "more of the same." Meaning, the actual net hires are going to fluctuate a bit, but as long as the job gain pace is in that range, we should see the unemployment rate slowly decline. For those following companies, this means the labor market stays tight and it will remain hard to find good people. For those following the Fed, it means they are going to stick with the 1x per quarter hiking pace.
The Fed is probably paying more attention to wage growth than anything else in this report.
On that score, Average Hourly Earnings rose 0.3% month over month, right on Bloomberg's survey and 0.1% faster than last month. That made for 2.7% year-over-year, also equal to the survey. That 2.7% number is right where wage growth has been for the last two years or so. Hence, how the labor market could seem this tight from hearing companies tell the story, and yet the statistics showing very little wage acceleration, remains a mystery.
My take is the same thing I've been saying for several months. Normally I'm one to trust the macro statistics over anecdotes, but in this case you we have way too much circumstantial evidence that wages are rising to ignore it. And that's whether its what firms say in surveys, what you hear on earnings calls, the quit rate in the JOLTS report, or the beige book, etc. Whether wage growth could or should be stronger is another debate. That the labor market is tight and wage growth is actually accelerating to some degree is settled business in my mind.
What Does It Mean for the Fed
Nothing about this report changes my base views for the Fed or the bond market generally. As long as job growth remains strong the Fed will remain on their same course: hiking every other meeting, or about once per quarter. Almost nothing can come that would derail hikes in September and December of this year. But if we get into 1Q 2019 and job gains are still in the high 100,000 range, the Fed is going to assume that policy is still accomodative and look to tighten further. They won't stop until job gains seem to have slowed. As I said in my Fed reaction column on Wednesday, that basically means they are going to keep hiking until they've done damage to the economy. At that point, it will probably be too late.
The Trades I Like
Nothing about this jobs report changes any of the positioning I have on.
Expect the curve to invert at around 2.8%. My guess is this happens after two more hikes, so around year-end we should be there. If Fed Funds is at 2.5% and the Fed is expected to keep hiking, the 2-year should be around 2.80-3.00% and the 10-year will be there or slightly lower. I still like the pair trade I've been suggesting: long 20-30 year bonds and short 3-7 year bonds. I'm doing this with Treasury futures, but the ETN (FLAT) works too.
The dollar should keep strengthening: I mentioned this Wednesday, but I'm definitely fading talk from the Bank of Japan and the European Central Bank that they are backing away from QE. Taper all you want, those economies aren't strong enough to handle truly tighter monetary policy. Hence we should see USD appreciate against at least those two majors. I'm long (USDU) . Watch out if you are long Emerging Markets debt instruments by the way. USD strength is a classic trigger for EM struggles.
Longer-term rates are attractive: The 10-year has hovered around 3% in recent days, but it should see strong support at 3.02% and again at 3.11%. I don't know if this is the top of rates per se, but I'd much rather be long than short. Inflation is the enemy of long-term rates, and when I write "the Fed will hike until it does damage" that isn't a story where inflation accelerates on a sustained basis.
It's a tough spot for stocks. Speaking of "hike until it does damage"... I'm not a stock analyst and I won't play one on the internet, but stocks are either going to get tighter policy or they're going to get a weaker economy. It just isn't a great spot for stocks either way.