Strong Job Growth Continues and Wage Gains Accelerate

  • Nonfarm payrolls increased 528 thousand with those gains continuing to be widespread while the unemployment rate dipped a tenth to 3.5%. Expectations were for 250 thousand jobs and the increase was well above June’s 398 thousand new jobs. It’s the highest monthly gain since February’s 714 thousand print. The largest gains came in healthcare, leisure and hospitality, and professional and business services. Those categories have been the leaders in job creation for several months now.  Total nonfarm payrolls and the unemployment rate at 3.5% are back to pre-pandemic levels.


  • Also, after several months of moderating wage growth, upward momentum returned in July.  Average hourly earnings rose 0.5% for the month, beating the 0.3% expectation and above the upwardly revised July gain of 0.4%. The year-over-year pace of wage gains was 5.2% vs. 4.9% expected and matching June’s 5.2% increase. In all, the reemergence of accelerating wage gains, and the solid job growth, will increase odds that the September rate hike will be 75 bps.


  • Another indicator the Fed won’t like is the one-tenth decrease for the second straight month in the Labor Force Participation Rate. It dipped from 62.2% to 62.1% as 63 thousand people left the labor force. Expectations were for it to remain unchanged at 62.2%. The pre-pandemic participation level was 63.4%, so the damage from the pandemic looks to be a long-term issue for the labor market and will keep upward pressure on wage gains.


  • As mentioned, the unemployment rate dipped a tenth to 3.5% after four straight months at 3.6%. The number of unemployed fell 242 thousand to 5.7 million. This level is essentially back to pre-pandemic levels and another indicator of a tight labor market.


  • It is a bit curious that the Household Survey (which is used to generate the various employment ratios) has been well below the Enterprise Survey’s job growth numbers for several months. For July, the Household Survey found 179 thousand jobs and reported negative job growth in June and May. It’s not unusual for the two surveys to report differences but they are usually not in the same direction for several months. We’ll see how this is resolved in the coming reports, but with several indicators pointing to labor tightness we lean towards the Enterprise Survey’s numbers.


  • As mentioned, this report obviously puts a 75bps hike firmly in play for September and talk of a higher terminal rate will gather some steam as well. The markets have currently priced in fed funds ending the year at 3.5% but that could lift after this report and the upcoming CPI report next week. In early trading, Treasuries are selling off across the curve (see below) as the stronger-then-expected read on the labor market implies a continued hawkish tone from the Fed and perhaps a higher terminal rate forecast.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.27 3.27 3.24 3.27 3.40 3.86
0.50 3.26 3.24 3.18 3.16 3.26 3.75
1.00 3.25 3.21 3.15 3.12 3.17 3.62
2.00 3.19 3.09 3.04 3.05 NA
3.00 2.99 2.99 NA
4.00 2.94 NA
5.00 2.91 NA
10.00 NA

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Published: 08/05/22 Author: Thomas R. Fitzgerald