Under normal circumstances, the answer to this question would be “yes”. Of course a stronger jobs number means a more aggressive Fed, especially in a tightening cycle, right? Well, in this climate, the issue is not certain. Lets take a look at the data:
Nonfarm Payrolls: +222K (expected 178K)
Jobless Rate (Pct): 4.4% (expected 4.3%)
In the last 5 weeks, the U.S. economy has added 893,000 jobs, averaging 178,600 jobs per month (which is a good pace) and the jobless rate has not gone above 4.4%. The labor participation rate has fallen from 63%, but it has moved back higher this week and has kept pace with the rate, although we are still hovering at an area we haven’t stalled at since the late ’70’s. Given this better than expected number, the markets should have fallen anticipating a more aggressive Fed, but it did not thanks to still weak wage growth. Hours worked edged up .01 to 34.5 hours, which is within the range we have held since the low of 33.7 in June ’09 to the high of 34.6 last seen in Jan. of ’16. Real wages only grew at .2% for a year over year growth of just 2.5%. While this is still growth, inflation does not pick up on a point for point basis with wages. According to the BLS labor is only 9.32% of direct costs of goods in heavy and civil engineering construction, which is one of the higher percentages. Given that those figures do not include administrative wage costs, executive wage costs, healthcare etc., its probably a low estimate, but it illustrates the fact that wages will not cause inflation to rise at a one to one ratio. 2.5% wage growth is not enough to drive a falling CPI to the Fed’s 2% target range.
Given all this, the strong headline payrolls number provided the stock market with another piece of Goldilocks data; a strong enough number to show continued economic strength but not strong enough to scare the markets into thinking the Fed will get more aggressive on rate hikes. There is one indicator saying the Fed should…global 10 year note interest rates. But that’s another post….