Economics: Mixed August U.S. Employment Report

The August employment report is the last major data point before the next Federal Reserve interest rate meeting. The data dependent Fed will need to interpret a mixed report, where job creation increased by 173K, but missed expectations of 217K. Meanwhile, the unemployment rate dropped to 5.1% from 5.3% and hourly earnings rose 2.2%, beating expectations of 2.1% year-over-year growth. Job creation was below trend, but prior month data was revised up by 30K. So the report was not overly positive or negative, and it did not indicate significant inflationary pressures. The Federal Reserve could interpret the report as they did last month, when they said, “The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year” (FOMC 07/29/15).

The interpretation of the August employment report and its potential to move interest rates off the zero bound is a coin flip as measured by short term futures contracts prices. It continues to be SNWAM’s position that the timing of the Fed’s interest rate decision is less important than the pace of rate increases. In the current environment of low inflation, moderate U.S. economic growth and slowing global growth, the Fed will be hard pressed to raise interest rates aggressively. This means portfolios with a mix of short and intermediate bonds will likely see limited downside price impacts from rising interest rates.