Just like Bill Gross recently said so eloquently, it's time for the Fed to get on its horse already and lift interest rates.
And the August employment report has probably sealed the deal for that happening in September. Non-farm payrolls missed estimates, rising by 151,000 in August vs. the 180,000 consensus. While the market is initially cheering the shortfall -- the premise being it pushed off rate hikes into December -- it may want to keep two big factors in mind.
- Broad-Based Strength in August
Despite the continued pressure on the U.S. manufacturing, oil and gas, and mining sectors due to the dollar's strength and rout in commodities, the economy continues to see broad-based strength in jobs. August showed solid gains in food service, social assistance, professional services, financial services and healthcare. The takeaway here is resilience, meaning the economy is still not falling badly victim to tepid order trends in goods producing industries. It makes recent layoff announcements from Harley-Davidson (HOG) , Walmart (WMT) , Cisco (CSCO) and others look more firm-specific rather than "the world is ending, let's sell stocks and buy bonds and CDs."
- July's Upward Revision
August tends to be a volatile month for payroll data, and the numbers often get revised up or down come September's report. This time around, it's reasonable to assume August could be bumped higher due to July receiving a solid 20,000 upward revision today. The takeaway here is that the U.S. economy is not only showing resilience, but it may be a touch stronger than many of the latest reads may suggest (such as the ISM report).
The million dollar question to be asking today is how the market digests the jobs report over the long holiday weekend. Initial enthusiasm could easily be wiped away come Tuesday, as investors conclude the August jobs data supports Yellen's more hawkish stance on policy conveyed at Jackson Hole. The way to play this possible turn in investor sentiment is by shorting an emerging market ETF such as the iShares MSCI Emerging Markets (EEM) .
When sentiment has rested on the notion that the Fed could be prepared to lift rates, the emerging market plays -- which continue to trade on inflated valuations due to the availability of cheap debt -- get whacked. Moreover, reads on the health of China's economy have been anything but healthy of late.Conversely, the wind could easily stay at the back of the financials -- not only would the prospect of a rate hike be ingrained in sentiment, but the sector added some 15,000 jobs in August as it benefited from a rally in stocks (and work on a wave of IPOs scheduled before year end).