A Fed-Friendly Employment Report

The stock market may try to stabilize this week, after it seemed to overreact to Friday's Fed-friendly August Employment.   The latter points to near-trend economic growth with little wage pressures, arguing for a measured 25 BP rate cut at the September 17-18 FOMC Meeting (as well as keeping the door open for more cuts in Q424).   This macroeconomic/policy background remains positive for stocks.  

To be sure, some market participants are concerned that a 50 BP rate cut is needed.  Disappointment that the Employment Report did not give unequivocal support for this size cut may have been a factor behind Friday's sell-off.  There could be disappointment again this week, since consensus expectations for August inflation data, if correct, may not be soft enough to satisfy market participants hoping for a 50 BP rate cut.  However, the underlying inflation data should be negligible and not be a problem for the Fed or markets.

The August Employment Report contained an almost ideal set of data from the Fed's perspective:

1.  The 3-month average of Payrolls is 116k m/m -- close to the +125k m/m pace that is consistent with a steady Unemployment Rate.  The +142k increase in August was likely in part a rebound from a negative weather impact in July.  The July-August average (+116k) about equals the June pace (+118k).

 2. With the Nonfarm Workweek recovering, Total Hours Worked rose to a level that is 0.8% (annualized) above the Q224 average -- supporting estimates of about 2.0% Real GDP Growth (taking account of productivity).

3.  The dip in the Unemployment rate to 4.2% from 4.3% resulted from Civilian Employment outpacing Labor Force.  Both the Labor Force Participation Rate and Employment-Population Ratio were steady.  This is not a sign of a softening labor market.  To be sure, the broader U-6 Rate edged up, apparently because of an increase in  people working part time for economic reasons.  All other broad measures of unemployment edged down.

4. The speedup in Average Hourly Earnings to 0.4% m/m could be just an offset to the low 0.2% in July -- in other words, just volatility.  The latest 3-month average is a trend 0.3% m/m.  Last week's revision to Q224 Productivity/Labor Costs had good news for the inflation outlook.  Compensation/Hour -- the broadest measure of labor costs -- slowed to 3.0% (q/q, saar) from 4.2% in Q124.  The y/y fell to 3.1% from 3.8%.

This week's inflation reports are expected to be moderate -- but perhaps not low enough for those hoping for  50 BP rate cut.  Consensus looks for +0.2% m/m for both Total and Core CPI in August, with the risk of a lower print for Total.  The y/y should fall for Total but be steady for Core.  Nevertheless, inflation should be essentially a non-issue.  This is because inflation outside housing rent is flat.  Although some prices climb, others fall -- balancing out.   And, the bulk of the measured rent is imputed, not actually paid.

The more interesting report may be the weekly Unemployment Claims data.  Both Initial and Continuing fell in the prior week, but this could have resulted from Labor Day being in the week.  This holiday effect could reverse in this week's report, boosting Claims.  If it does, the two weeks' data should be averaged and compared to the July averages (232k Initial, 1.853 Mn Continuing).  If it does not, it would suggest that labor market weakness may have bottomed.