Author: Davis Finke, CFA
Following Fed Chair Kevin Warsh’s comments last week that the Fed views labor-market conditions as consistent with full employment, investors received a slew of employment data this week. The most anticipated release was Friday’s nonfarm payrolls report, which showed that the U.S. economy added 162,000 jobs in August. Well above expectations of 56,000, the August reading was the highest in five months and more than five times greater than the average monthly gain of 31,000 over the past 12 months. Leisure and hospitality, local government education, construction, and manufacturing were the largest contributing sectors, while information employment posted the largest decline. Payroll figures for June and July were also revised higher by a combined 55,000, while the unemployment rate held steady at 4.1% in August. While job cuts increased during the month, job openings also rose and remained above the total number of unemployed workers. Taken together, the data suggest that the labor market remains healthy, with continued employment and wage gains helping support consumer spending and the broader economy. With more evidence supporting the Fed’s view that the economy is at or near full employment, policymakers likely now have greater flexibility to focus their efforts on the price-stability side of their dual mandate.
That flexibility became increasingly relevant following Friday’s robust jobs report, as futures markets raised the implied probability of a rate hike this month to roughly 60%, up from 50% just one day earlier. With yields already near year-to-date highs and borrowing costs increasing, the increased likelihood of a rate hike weighed on markets to end the week. All three major U.S. equity indexes fell sharply on Friday, wiping out Thursday’s gains and pushing weekly performance lower. The Dow fell 0.28% for the week, followed by the Nasdaq, down 0.14%, while the S&P 500 finished slightly higher, up 0.06%. Further weighing on sentiment were reports earlier this week that U.S. forces and Iran exchanged strikes, marking the first direct exchange of fire between the two sides since late July. As a result, oil prices continued their rise, with Brent crude up 8.89% for the week and exceeding $96 per barrel. The energy sector was the primary beneficiary, increasing 2.21% for the week and outpacing all other sectors. Technology (+0.85%), utilities (+0.77%), and health care (+0.16%) were the only other sectors to finish higher. Consumer discretionary, materials, and real estate were the worst-performing sectors, each falling more than 1.25% for the week.
Looking ahead to next week, investors will likely focus on the results of multiple Treasury bill auctions. With yields under recent pressure, these auctions could have a significant impact on short-term rates and broader risk sentiment. Next week will also provide investors with additional inflation data, with August PPI being released on Thursday followed by August CPI on Friday. With the labor market continuing to show resilience, next week’s inflation data could take on added importance as investors assess whether the Fed has sufficient justification to tighten policy further. These results will likely influence rate-hike probabilities, with any further increase in the likelihood of a hike potentially weighing on equity markets.
