A Good Employment Report for Stocks and Fed -- Not Treasuries

The stock market could tread water in this data-light week as it consolidates last week's bounce.  The August Employment Report justified the bounce, as it showed an easing in labor market conditions and slower wage gains while economic growth continues -- all stock-market positives.  It arguably supports a pause in Fed tightening at the September 19-20 FOMC Meeting.  The last hurdle will be the August CPI on September 13.  Stocks and Treasuries may trade cautiously into it, since the risks are to the upside -- in part reflecting higher commodity prices.

The important message from the Employment Report is that labor market capacity may have increased.  Even though Civilian Employment climbed 222k, in line with the solid 187k gain in Nonfarm Payrolls, Labor Force jumped 736k as the Participation Rate rose.  Increased participation of the population in working or looking for a job expands the labor market's capacity to accommodate stronger demand for labor.  The expanded capacity is seen in the jump in the Unemployment Rate to 3.8%, its highest level since February 2022.  Increasing labor supply rather than reducing demand is the best way to achieve the Fed's goal to loosen labor market conditions.  To be sure, it remains to be seen whether the higher Participation Rate is sustained in coming months  For now, the August jump gives the Fed a window to pause.

The slowdown in Average Hourly Earnings (AHE) to +0.2% m/m from +0.4% in each of the prior four months is an encouraging sign that the labor market is easing.  To be sure, the slowdown may be partly noise, as the AHE slowed from July in only 6 o the 13 major sectors.  However, more importantly, the 3-month average is 0.3% or lower for 8 of these sectors.  A 0.3% m/m or lower increase in AHE is consistent with the Fed's 2% price inflation target, taking account of productivity growth.  

The Report's evidence of solid economic growth may be problematic for the longer-end of the Treasury market.  Treasuries still need to be concerned that some restraint will be needed to ensure non-inflationary growth.  There was nothing in the Report to suggest a slowdown in economic activity over Q323.  Besides the speedup in Nonfarm Payrolls (+187k in August from +150k in July), the Nonfarm Workweek rebounded.  Both lifted Total Hours Worked, so that the July-August average is 1.0% (annualized) above the Q223 average, compared to 0.0% (q/q) in Q223.  The renewed upturn in commodity prices also hints at faster economic growth internationally as well as in the US.  The Atlanta Fed model's estimate of Q323 Real GDP is now 5.6% (q/q, saar), after Real GDP rose 2.1% in Q223.