Jobs Blowout Meets Oil Shock: Fed in a Tight Spot
The August jobs report revealed that the US economy added 162,000 new jobs, nearly three times the expected amount. Unemployment remained steady at 4.1%, and labor-force participation ticked up to 61.6%. The average hourly earnings rose 0.3% month-over-month and 3.1% year-over-year, while the average workweek increased to 34.4 hours.
The strong jobs report provided more evidence that the economy is not slowing down enough for the Federal Reserve (Fed) to keep interest rates low. This has sparked debate among economists about whether the Fed should raise rates or sit tight. Some, like Kevy, believe that the bond market has already done most of the work in tightening financial conditions and raising the cost of long-term money.
The 10-year Treasury yield has increased by 22% since its March low, making it more expensive for consumers to borrow. This has sent a signal to the Fed that they don't need to raise rates further. However, others argue that with oil prices rising due to geopolitical tensions in the Middle East, the Fed may need to consider raising rates to slow down the economy and reduce demand for oil.
The bond market is already reflecting these concerns, with yields on 2-year, 10-year, and 30-year Treasury bonds increasing. The 2-year yield rose to 4.41% before settling at 4.36%, while the 10-year yield reached 4.81% before settling at 4.78%. The 30-year bond traded up to 5.27% before ending at 5.24%.
Gold prices fell 1.2% on Friday due to rising yields and a stronger dollar. The Dow, S&P, and Nasdaq indexes all declined, but not as sharply as expected. Asian stocks lost ground, with Japan's Nikkei falling 1.7%, while European markets were down but not panicky.
The week ahead will be crucial for the Fed, with key economic indicators such as PPI on Thursday and CPI on Friday set to provide insight into inflation pressures. The FOMC meeting next week begins on Tuesday, followed by Kevy's press conference on Wednesday. With the bond market already doing most of the work in tightening financial conditions, it remains to be seen whether the Fed will take further action.