Jobs Report Set to Seal September Fed Hike, Not Future Path

(Bloomberg) -- An August rebound in U.S. payrolls would all but cement a Federal Reserve interest-rate increase this month. Yet investors will probably retain doubts about another hike this year, barring a surprise acceleration in wages.

Employers added 198,000 workers last month after 157,000 in July, helping to trim the jobless rate to 3.8 percent to match the lowest level since 1969, according to a Bloomberg survey ahead of Labor Department data due Friday. Average hourly earnings likely rose 2.7 percent from a year earlier for a third straight month, only slightly above the 2.5 percent average in 2017.

While low unemployment and a solid economy mean a September interest-rate hike is a near lock, lackluster pay is among reasons why investors aren’t fully convinced the Fed will deliver on its outlook for a fourth 2018 hike in December. There’s also an escalating trade war, turmoil in emerging markets and the risk that Fed rate increases will push short-term Treasury yields above long-term rates -- the so-called yield-curve inversion that preceded previous recessions.

“The labor market is in a good place,” and a solid advance in jobs would be “Goldilocks enough” to help seal a September interest-rate hike, said Michael Gapen, chief U.S. economist at Barclays Plc in New York and a former Fed economist. At the same time, given where investors stand on a December move, “markets would react very strongly to any indication that wage growth is picking up” and mark up odds of another rate rise before year-end, he said.

Markets are fully priced for a hike when policy makers gather Sept. 25-26, yet give just about a 70 percent probability of another move in December. Futures traders are currently wagering for less than two hikes in 2019. The Fed’s quarterly projections, seen as dots on a plot, indicate four total total increases this year and three in 2019.

For now, the U.S. economy and job market, juiced by President Donald Trump’s tax-cut stimulus, look resilient to the risks from his administration’s trade war. Weekly filings for unemployment benefits are the lowest in almost five decades, while the Institute for Supply Management’s August manufacturing survey showed its index of employment climbed to a six-month high.

Economists project that factories added 24,000 workers in August, according to the median estimate, which would mark the 11th straight month of at least 20,000.

Data out Thursday from the ADP Research Institute suggested that hiring may have cooled last month. Businesses added a below-forecast 163,000 jobs in August, the least in almost a year, according to the report.

August payrolls may benefit from a fading of some transitory factors. Store closings at Toys “R” Us Inc. imposed a drag in July, one reason why the category representing sporting goods, hobby, book and music stores lost 31,800 jobs, the biggest decline in data back to 1990. Economists also expect a rebound in local-government education payrolls, which tend to be volatile in the summer and fell in July.

Despite robust demand for workers, pay gains have remained disappointing by many measures throughout the economic expansion that began in mid-2009. They’ve also become a contentious issue for Republicans and Democrats heading into midterm congressional elections in November.

Figures released Aug. 10 showed price-adjusted wages were unchanged in July from the previous month and fell 0.2 percent from a year earlier. The White House issued a report Wednesday arguing that compensation looks better when accounting for factors such as employment benefits, retiring baby boomers and this year’s tax cuts.

Even so, companies’ concern over tariffs will keep a lid on wages, according to Peter Yi, head of short-term fixed income at Northern Trust Asset Management, which oversees $946 billion in assets. That, along with Fed concern over inverting the yield curve, has him projecting the central bank will stand pat in December and hike just once in 2019.

“The Fed’s tightening cycle is going to be much shallower” than the central bank is indicating, Yi said. “Companies are going to continue to focus on using temporary workers and keeping wages just at modest increases until they get better clarity on the economic environment and what these tariffs look like.”

While Fed Chairman Jerome Powell has indicated tightening plans remain unaffected by the yield curve -- and its usefulness as a recession predictor is being debated -- Yi said the central bank “is really afraid of inverting” the curve.

The gap between two- and 10-year yields is near the smallest since 2007, the year the curve was last inverted, just before the worst economic slump since the Great Depression.

For this week, though, wages remain key in the employment report.

Average hourly earnings could come in higher than expected “given the building tightness around the labor market and anecdotal evidence from business leaders” on plans to boost pay, Sam Bullard, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in a note.

“That said, we are still waiting for greater acceleration in the pace of wage growth,” he said.

--With assistance from Chris Middleton.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net;Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, ;Benjamin Purvis at bpurvis@bloomberg.net, Randall Woods

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