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August’s Ho-Hum Hiring May Not Be Enough to Slow Fed

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September 4, 2015

Early stock indicators slumped ahead of and after a fuzzy Friday morning job-market report that only intensifies the debate around the mid-month interest rate decision at the Federal Reserve. It could be that uncertainty, rather than the ho-hum report, that’s driving pre-holiday stock selling. August job gains missed the mark but leave many observers suggesting there’s little in the report to keep the Fed from raising rates if it wants to.

Dow Jones Industrial Average ($DJI) futures were down nearly 200 points ahead of the report as European stocks slumped, leaving little bullish inspiration for U.S. markets. U.S. stocks largely held those early losses, while benchmark 10-year Treasury yields and the U.S. dollar gained, after the new round of hiring data hit. The report showed a smaller-than-expected gain in new hires last month, news that initially drove futures lower. Volatility could persist however, as Fed action is far from clear.

Stock bulls may read the weak report as a sign that extra economic juice via low rates will continue. But at least one voting Fed member was at the microphone early Friday. He said a course toward higher rates remains the best course for the U.S. economy, no matter what one month’s employment data shows.

SPX-support-line

FIGURE 1: NEXT TARGET?

The S&P 500 (SPX) gained Thursday, holding the 1950 line that chartists said could prove to be an important accomplishment. SPX levels could be challenged today as European losses and sluggish jobs data revive stock volatility. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

By the Numbers. The U.S. economy created a modest 173,000 new jobs in August. That’s below Street expectations and is the smallest gain in five months. The unemployment rate fell to a seven-year-low 5.1% from 5.3%, the government said Friday. Construction payrolls rose 3,000 last month on top of the 7,000 jobs added in July. Mining and logging employment fell by 10,000 jobs last month. Manufacturing payrolls fell 17,000, despite robust demand for autos. Now, employment gains for July and June were revised up by a combined 44,000. The Labor Department said 245,000 new jobs were created in July instead of 215,000. June's gain was revised up to 245,000 from 231,000. Speaking of revisions, many economists are wary of August numbers anyway. The report may have been tarnished by a statistical fluke—a limited late-summer survey response—that in recent years has frequently led to sharp upward revisions to payroll figures for August after initial weak readings, Reuters noted.

Wages Up 2.2% in Past Year. Wages are improving and show little sign of the flare up that might invite broader inflation, but are wages enough to accelerate what’s been spotty consumer spending? The average hourly wage rose 0.3% in August, Labor Department data showed. From August 2014 to August 2015, hourly wages rose 2.2%. Annualized increases in pay have stuck to a tight range of 1.9% to 2.2% since 2012, according to MarketWatch. The amount of time people worked each week edged up 0.1 hours to 34.6 in August. The labor-force participation rate was unchanged at 62.6%.

Fed’s Lacker Appears Ready to Hike. If the August employment report disappoints, Fed officials should view it as a "one-month blip" that would not negate the stronger trend in the labor market, said Richmond Fed President Jeffrey Lacker said in a early Friday speech that took place before the report’s release. Lacker holds a vote this year on the Fed’s rotational policy panel. Lacker said the case for raising rates remains strong despite recent financial market volatility. The stock market’s performance will have only a "quite limited" effect on the U.S. outlook, he said. "I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring," Lacker said, according to financial press reports. The Bureau of Labor Statistics' JOLTS report, which shows the number of job openings, has been a widely cited indicator signaling a labor market that is back near full employment.

U.S. markets are closed Monday for Labor Day. Enjoy the long weekend.

Good trading,
JJ
@TDAJJKinahan

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