Time to Ask for That Raise
Prior Week Summary
The August employment report jolted the market back to life after a relatively low-key end to the summer. The Labor Department reported that wage growth increased 2.9% from a year earlier while employers added 201,000 jobs in August, maintaining the unemployment rate at 3.9%. The gain in wages was the strongest in nearly a decade and surpassed the forecast of even the most optimistic economist in the Bloomberg survey. The market reacted quickly to the news, as Treasury yields rose 7 to 8 basis points across the curve, the dollar strengthened, and equities sold off marginally after an initial push higher. Many market strategists had been pointing to lackluster wage pressure as indicative of a labor market with greater slack than a sub 4% unemployment rate would normally suggest, so the strength in the numbers seems to have caught some by surprise.
In the context of the currently large difference between short-term rates implied by the Fed’s dot plot and market based pricing expectations, Friday’s increase in rates was relatively small. Interestingly, the FOMC was likely aware that an increase in wage pressure was on the horizon when they published their latest projections. The minutes of the last FOMC meeting detailed that “some participants expected a pickup in aggregate nominal wage growth to occur before long, with a number of participants reporting that wage pressures in their Districts were rising or that firms now exhibited greater willingness to grant wage increases.”
While the market has been broadly anticipating a 25 basis point hike at the upcoming FOMC meeting for some time, the implied odds of a second hike in December have now increased to 75%. Short-term government yields are sitting at the highest levels in a nearly a decade. The long-term decline to near-zero risk free rates began in the run-up to the collapse of Bear Stearns and accelerated quickly with the GSE conservatorships, the AIG bailout, and the Lehman bankruptcy in September 2008. A decade later, inflation adjusted Treasury yields are still over 100 basis points lower than their pre-crisis levels, but moving higher.
The Look Forward
Markets will look forward to the release of consumer and producer prices as well as retail sales data this week for additional signals of quickening inflation and consumer strength.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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