Softening Employment Situation In August Just What Fed Wants To See

For the Friday before Labor Day weekend, there is actually a good bit of news for the market to chew on. What remains to be seen is just how many participants will take a seat at the table. The participation in this week’s gains hasn’t exactly been robust; nonetheless, this week has been defined by a lack of selling interest amid declining market rates.

We are seeing more of the same this morning, too. There was a lack of selling interest before the release of the August Employment Situation Report and there has been an increase in buying interest after its release.

Currently, the S&P 500 futures are up 25 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 86 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 147 points and are trading 0.5% above fair value. The 2-yr note yield, which is more sensitive to changes in the fed funds rate, is down four basis points to 4.82% after sliding to 4.78% immediately after the release of the employment report. The 10-yr note yield is unchanged at 4.09% after dropping to 4.05%.

The focal points for the futures market were the softening in nonfarm payrolls after accounting for revisions, the jump in the unemployment rate to 3.8%, and the moderation in average hourly earnings growth.

Altogether the key takeaway from the report is that it was a Goldilocks report as it pertains to the market’s thinking that the Fed won’t be raising rates again.

There are clear signs of softening in the employment situation, including a decline in temporary positions, an uptick in the percentage of workers unemployed for 27 weeks or more, and a pickup in the U6 unemployment rate, which accounts for underemployed workers. That softening is exactly what the Fed has been expecting to see — and hoping to see — in response to its campaign to get inflation back down to its 2.0% target.

Yesterday’s core-PCE Price Index for July suggests there is more ground to cover in getting the inflation rate down, yet today’s August employment report should provide the Fed some cover to be patient with its current policy stance.

Notable headlines from the August Employment Situation Report:

• August nonfarm payrolls increased by 187,000 (Briefing.com consensus 175,000). The 3-month average for total nonfarm payrolls fell to 150,000 from 181,000. July nonfarm payrolls revised to 157,000 from 187,000. June nonfarm payrolls revised to 105,000 from 185,000.
• August private sector payrolls increased by 179,000 (Briefing.com consensus 160,000). July private sector payrolls revised to 155,000 from 172,000. June private sector payrolls revised to 86,000 from 128,000.
• August unemployment rate was 3.8% (Briefing.com consensus 3.6%), versus 3.5% in July. Persons unemployed for 27 weeks or more accounted for 20.3% of the unemployed versus 19.9% in July. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.1% versus 6.7% in July.
• August average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.4% in July. Over the last 12 months, average hourly earnings have risen 4.3%, versus 4.4% for the 12 months ending in July.
• The average workweek in August was 34.4 hours (Briefing.com consensus 34.3), versus 34.3 hours in July. Manufacturing workweek was 40.1 hours for the fifth straight month. Factory overtime dipped 0.1 hour to 3.0 hours.
• The labor force participation rate was 62.8% versus 62.6% in July.
• The employment-population ratio held steady at 60.4%.

In the other news of note, lululemon athletica (LULU), Dell (DELL), MongoDB (MDB), Elastic (ESTC), and Nutanix (NTNX) are all trading higher after their latest earnings results, whereas Broadcom (AVGO) is on the defensive, reportedly because its in-line fiscal Q4 revenue guidance underwhelmed investors’ higher expectations. 

Separately, Dow component Walgreens Boots Alliance (WBA) is making a splash this morning, having announced that CEO, Rosalind Brewer, eh hum, stepped down from her position as CEO and member of the Board as of August 31. Walgreens also said it expects its FY23 EPS to be at or near the low end of $4.00-4.05 and that it has appointed Ginger Graham, the current lead independent director, to be interim CEO.

On the international front, the August Caixin Manufacturing PMI out of China was stronger than expected at 51.0; and the PBOC said it will lower the foreign exchange reserve requirement ratio to 4.00% from 6.00%, effective September 15, in an effort to support the yuan. Manufacturing PMI readings out of the eurozone, Japan, Australia, and South Korea, meanwhile, remained in contraction territory (i.e., sub-50.0).

The August ISM Manufacturing Index for the U.S. will be released at 10:00 a.m. ET.

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Originally Posted September 1, 2023 – Softening employment situation in August just what Fed wants to see