This morning’s employment report for July gives the bond bulls one more reason to buy.
The unemployment rate rose to 4.8% last month, the highest since February, the Bureau of Labor Statistics announced. Meanwhile, the economy added only 113,000 new jobs, based on the nonfarm employment survey–the smallest increase since April’s 112,000 rise.
“The uniformity of the evidence of softer labor market conditions should make the FOMC decision next week easy,” writes David Resler, chief economist at Nomura Securities in New York, this morning in a note to clients. “With virtually all the recent reports confirming the FOMC’s [view] that the economy is now on track for the forecasted ‘moderating growth,’ and with market interest rates possibly suggesting that the slowdown is more severe than desired, the prudent course for policymakers is to maintain current policy until a clearer picture of the outlook develops.”
But while the payroll trend continues to show continued weakness, the related inflation tied to wages continues to inspire caution on matters related to turning the handle on the monetary-sausage machine. The widely monitored average hourly earnings for the private sector rose by 0.4% last month, unchanged from June’s pace but still in the upper range of monthly advances for the past several years. On a 12-month rolling basis, July’s jump in hourly earnings was 3.8% higher compared to July 2005, which is also in the upper range posted in recent years, as the chart below illustrates. To the extent that wage pressures are helping elevate inflationary momentum, today’s report won’t do much to assuage such fears.
But if the Fed must make a choice between juicing the economy so as to avoid a recession vs. nipping any mounting inflationary pressure in the bud, the former is getting the bond market’s vote of late. The yield on the 10-year Treasury fell again yesterday, settling at 4.951%–the lowest since mid-April. Meanwhile, in the wake of the July employment report comes a burst of buying in the August Fed funds futures contract in early trading today, which reflects the strengthening sentiment that the central bank will take a pass on another rate hike at next Tuesday’s FOMC. If so, that would be the first pause in two years of elevating the price of money.
But while the consensus is now predicting the Fed will take a breather, it’s worth remembering that there’s a complicating factor overhanging Treasury pricing and the associated signals on inflation expectations that spring from current yields. Fear, it seems, is no trivial force driving money into government bonds, and thereby lower yields. That decline in the price of money, in other words, isn’t wholly a reflection that inflation’s a waning threat. With the Middle East ravaged by war in more than a few locales, anxious deployers of capital the world over are finding fresh incentives to park money in what is still regarded as the safest paper obligations on the planet.
Of course, even the mighty Treasuries have competition when it comes to stores of value. Perhaps that’s why gold is again moving higher, having jumped by around $100 an ounce over the last two months.
The Fed has a very simple and one-dimensional tool for addressing a very complicated world with a myriad of economic and geopolitical cross currents. Up, down or hold are the choices for monetary policy. If only the real world were that simple.