Excellent Unemployment Report Offsets May's Disappointment
I don’t know whether the Fed is breathing a big sigh of relief or tearing their hair out or doing both at the same time when they see the unemployment report this morning. The headline numbers look very good – 287,000 new jobs, unemployment rate at 4.9%, hourly earnings up 2 cents, and participation rate up to 62.9%. Revisions to April and May amounted to a loss of only 6 thousand jobs. The new jobs number is a bit deceiving as 70,000 of that represents the striking Verizon workers returning to their jobs. So, in the same way that May’s number was distorted downward by that strike, this month’s number is distorted upward. But make no mistake, this was still a very strong report.
Where this leaves the Fed is hard to say. I’m guessing that the hawks will once again start to push for at least one rate increase this year despite the global risks to the downside over Brexit, concern over European banks, and the collapse of interest rates around the globe. The latter should concern the Fed most of all – US 10 and 30 year bond interest rates sank to all time lows; 10 year rates in Germany, Switzerland, France, and even Australia also hit all time lows. Shockingly, forward rates out 15 years in Germany and 9 years in France are negative. The markets are signaling years of record low interest rates for the foreseeable future. Yet, year after year, the Fed predicts that inflation will shortly reach its target range and rates will rise accordingly. The markets are strongly saying otherwise and every time the Fed signals another rate increase that they have to pull away from creates an even greater lack of confidence that the Fed truly understands where we are.
Right now nothing will be decided – there is still plenty of new data to be seen between now and the September meeting. I also have a feeling that, despite what they may say, the Fed will be a little gun-shy about making a move right before the election for fear of being labeled “political”. So any push for a rate increase or even decrease won’t happen until December, if at all. Let’s hope that in the intervening months, Fed statements start to reflect the reality of the markets. And let’s not forget what a low interest rate future means for fiscal policy either – but that’s for another post.