July's surprise job losses and a falling unemployment rate expose a quietly weakening labor market, and test the Fed's data-driven approach.
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Hello and welcome back to The Weekly Fix. My name is Mindy Gudmundson, and I am an Institutional Portfolio Manager with the BlueBay Fixed Income team of RBC Global Asset Management.
Markets navigated mixed signals last week as mid-week hawkish Federal Reserve commentary collided with Friday's unexpectedly weak payrolls data. Fed Chair Kevin Warsh has signaled that he prefers a smaller role for the Fed in the economy and financial markets, with fundamental factors and economic data expected to dominate policy.
Notable on the data front last week, we learned that employers unexpectedly shed 23,000 jobs in July. May and June data were also revised lower by a combined 103,000 jobs, with job losses concentrated in the Government, Leisure and Hospitality, and Retail Trade sectors. The latter two categories are consistent with a slowdown in consumer spending.
Interestingly, the unemployment rate fell to 4.1% despite job losses—a counterintuitive outcome that reflects declining labor force participation rather than underlying labor market strength, as workers exited the labor force instead of being counted as unemployed.
The new jobs data led to front-end yields rallying as much as 8bps intraday. Short-term treasuries posted their biggest weekly gain since May, and the S&P Index surged to new record highs, driven by robust quarterly earnings and moderation of tech fears following mid-month volatility. The bond yield rally was also supported by renewed hopes for an Iranian peace deal. Should that materialize, a decline in crude oil prices could offer a catalyst for yields to rally further.
This week, we expect the dominant event to be the release of July's CPI, which is forecast to rise 0.1% month over month following June's 0.1% decline, which was the first drop in six years. The benign June data removed pressure on the FOMC to implement an early rate increase, and while July's Core CPI is expected to show some cooling, a hotter-than-expected print would likely revive September hike pricing aggressively. Producer prices will follow the CPI print and will provide additional color on pipeline inflation pressures. Retail sales are also expected late in the week, which should provide additional insight into the health of the American consumer.
It has become clear that data releases are more important under Fed Chair Warsh in terms of understanding the Fed's policy reaction function, and with a growing minority seeking a rate hike, it will be key to watch the data closely. We'll continue to do just that and adjust our outlook and portfolio positioning accordingly as new information emerges.
Thanks for joining us today and have a great week!
Key takeaways
Employers unexpectedly shed 23,000 jobs in July, with May and June revised lower by a combined 103,000. Losses were concentrated in Government, Leisure and Hospitality, and Retail Trade, sectors consistent with a slowdown in consumer spending.
The unemployment rate fell to 4.1% despite job losses, a counterintuitive outcome that reflects declining labor force participation rather than underlying labor market strength.
Under Fed Chair Warsh, data releases now dominate the policy reaction function, making the upcoming Consumer Price Index (CPI), producer price, and retail sales prints critical to September rate-hike pricing.