The focus on a better economic outlook along with “sooner-but-slower” raises the likelihood of a September liftoff. And while we also expect this date, the market remains unconvinced, leaving some room for rates to rise into the September meeting, particularly in the front of the U.S. rate curve where more sensitivity (and given current pricing, more vulnerability) to higher Fed rates lies.
Market Realist – A September rate liftoff seems very likely given the current economic environment. Janet Yellen, the Fed chair, has already indicated the Fed’s inclination to hike rates this year, stating that delaying normalization could mean faster hikes in the future. Faster rate hikes could threaten economic growth and could even derail recovery—something that the Fed would be loath to do.
The July employment report shows an increase in non-farm payrolls by 215,000. The May and June figures were revised upward from 254,000 and 223,000 to 260,000 and 231,000, respectively. The following is a snapshot of the employment situation by sector, according to data from the Bureau of Labor Statistics:
- The retail trade (XRT) sector added 36,000 jobs in July and 322,000 over the year.
- The healthcare sector (XLV) added 28,000 jobs in July and 436,000 jobs over the year.
- Financials (XLF) added 17,000 jobs in July and 156,000 over the year.
- Professional and technical services added 27,000 jobs in July and 301,000 jobs over the year.
- Manufacturing employment added 15,000 jobs in July.
- Employment in food services increased by 29,000 in July and by 376,000 over the year
- Mining employment is still being affected by deflated oil prices, leading to a reduction in 78,000 jobs since December 2014.
As the figure above shows, the addition in non-farm payroll continues to stay above the five-year average of 191,000 jobs.
The unemployment rate is continuing to tick downward and is within touching distance of the Fed’s economic projections. The current civilian unemployment rate stands at a 7-year low of 5.3%. The U-6 unemployment rate, which includes those employed part-time for economic reasons, also stands at 10.4%, drastically reduced from the 17.1% rates seen in 2009.
According to the BLS, average hourly earnings have ticked up to $24.99 in July, putting the year-over-year average hourly earnings growth at 2.1%. The average workweek has also ticked up to 34.6 hours in July. Currently, the jobs market looks robust and gives the Fed good reason to consider hiking rates.
The previous graph shows the leading, coincident, and lagging economic indices by Conference Board for the past three months. All have been edging upward, indicating strength in the US economy (IVV) (VTI).
Dennis Lockhart, president of the Atlanta Fed, recently stated in the Wall Street Journal that it would take “significant deterioration in data” for him to reject the idea of a rate hike in September. James Bullard, president of the St. Louis Fed, also noted in the Wall Street Journal that the US economy looks to be in “good shape” for a rate hike.