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Jobs Report Good Enough? Rate Markets Nudge Up September Hike Odds

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August 7, 2015

U.S. stock index futures fell, Treasury yields edged up, and the dollar gained after the latest installment of jobs data was perceived to be strong enough to greenlight the Federal Reserve. At the same time, stubbornly slow wage growth is seen likely keeping any Fed moves slow and calculated. So the Fed is getting what it wants, we think, reduced slack in the job market but not snapped so tight that it’s kicking up inflation.

The U.S. created 215,000 new jobs in July. That may be just shy of a Street projection for about 225,000 payrolls additions but it was close enough to keep the buzz for a September rate hike alive, analysts said. If the Fed moves on rates this year as most expect, it will be the first interest rate increase since 2006.

The unemployment rate, meanwhile, was unchanged at 5.3%, nailing Street expectations. 

FIGURE 1: ALL AROUND THE MARK.

The S&P 500 (SPX) on Thursday closed another session shy of the closely watched 2100 line as cautiousness crept in ahead of job market data. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Improved Hiring Pace. Employment gains for June and May were revised up by a combined 14,000, the Labor Department said Friday. The government said 231,000 new jobs were created in June instead of 223,000. May's gain was raised to 260,000 from 254,000. In the past three months the economy has created an average of 235,000 jobs, up from a 195,000 pace in Q1, MarketWatch reports. And in other data: The amount of time people worked each week rose 0.1 hours to 34.6, matching a postrecession high. The labor-force participation rate was unchanged at 62.6%, which is the lowest level in 38 years.

Paychecks: Slow Growth. The average hourly wage paid to U.S. workers rose 0.2% in July. That’s headed in the right direction but still slow enough to raise some concern for the pace of retail sales, especially spending on big-ticket items (of course, the latest car sales data was pretty good). From July 2014 to July 2015, hourly wages rose 2.1% vs a 2% pace in the previous month, Labor Department data showed. Annualized increases in hourly pay have been wedged in a tight range of 1.9% to 2.2% since 2012. The Fed is closely watching this reading; wage gains are needed to accelerate the economy but a flare in wage growth could spell inflation.

What’s the Market Pricing In? The perceived odds of an interest rate increase at the September Federal Open Market Committee meeting sit at 56% post-report, compared with 46% before the jobs report and 48% yesterday, according to trader pricing in the Fed funds futures market. It's commonly used by investors and traders to gauge potential central-bank policy. The odds of a rate hike at the December meeting stand at 79%, versus 72% pre-report, and 73% yesterday, the Fed funds market indicates.

Good trading,
JJ
@TDAJJKinahan

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