Payrolls point to not just QT but another rate hike this year

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Payrolls

Sorry for late response to the payroll report as I was on a plane. As you’ve most likely seen the all of the data where job growth remains good, I feel what’s most important for markets and the Fed is that today’s internals give them a green light (in their Phillips curve eyes) to not just initiate QT in September but to also raise rates again in December. While wage growth hasn’t accelerated from here, the 2.8% average weekly earnings gain matches recent highs and with hours worked up about 2% y/o/y and GDP growth no different, productivity growth still remains about zero. This lack of productivity is still a lid on faster wage growth but that real wages continue rise much faster than productivity is evidence that labor is getting a bigger piece of the profit pie. Also, while the drop was modest, the pool of available labor continues to shrink and sits at the lowest level since April 2008. See chart:

There was also a drop in part time workers “for economic reasons” which means it’s becoming more voluntary. Lastly, while the employment to population ratio remains well below the pre recession high, it did match its highest level since early 2009.

Bottom line, QT will start in September. With respect to a December rate hike, the market still doubts it as measured by the fed funds futures where odds are at just 46% but data such as today if it continues I believe will lock in another rate increase then. Fed President Eric Rosengren doesn’t vote but if his expressed views this week are an indication of the committee’s thought process, it is more evidence that another rate hike is coming this year. He said “My best guess is that the longer run trend is that labor markets will be tightening, that wages and salaries will go up to the point where we’re going to start seeing it reflected in prices, and that’s actually shown in most economic forecasts.” He went to say “I think we’re getting to the point in many places…where they’re saying ‘It’s going to cost me too much money not to hire the extra labor. It’s worth paying those higher wages.’…In places where labor markets are tight, such as New England, I think we’re starting to see employers starting to move. They’re certainly noting that at current wages they’re having trouble attracting the workforce they want.”