August Jobs Report Could Seal Fed Rate Hike

In her speech from Jackson Hole, Janet Yellen said that U.S. economic activity continues to expand, led by solid growth in household spending. The second estimate of GDP backed up that sentiment. Although government and business spending slipped in the second quarter and overall growth was just 1.1 percent, consumer spending increased at a 4.4 percent annualized pace, the biggest gain since late 2014 and far better than last year’s 3.2 percent. Yellen also noted, “while economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market” and “the case for an increase in the federal funds rate has strengthened”. And if there is continued economic progress, as the central bank expects, the Fed should be able to gradually keep increasing the federal funds rate, despite the fact that inflation is running below the central bank’s stated two percent objective.

For most of this year, the Fed has been focused on the U.S. labor market, along with international developments/dramas (China’s slowdown earlier in the year and the UK Brexit vote in June), in managing monetary policy. That’s why this week’s release of the August jobs report could tip the scales for the September 20-21 FOMC policy meeting. If job creation jumps well beyond the consensus estimate of 200,000 expected for the month, the Fed could argue that the labor market is gaining steam (June saw a 292,000 gain and July increased by 255,000) and therefore a September rate hike might be justified. Conversely if the August jobs number is a disappointment and/or if other upcoming economic data disappoint, the Fed could remain on the sidelines.

Traders, who had seen just a 20 percent probability of a September rate hike the week prior, interpreted Yellen’s comments as more hawkish than previously believed. According to fed-funds futures’ Friday settlement, the probability of a quarter-point rise in September had doubled to over 40 percent and the likelihood of a rate hike at the December 13-14 FOMC meeting was up to over 60 percent, from 50-50 a week ago. While there is a meeting in early November, it occurs just days before the presidential election, so most believe the Fed will choose to stay mum for that one.

MARKETS: As traders turn the page on August and look to September, it is worth mentioning that September has historically been the worst month for stocks. According to the Stock Traders Almanac, September has seen an average decline of 0.5 percent in the Standard & Poor’s 500 index since 1950.

• DJIA: 18,395, down 0.9% on week, up 5.6% YTD
• S&P 500: 2169, down 0.7% on week, up 6.1% YTD
• NASDAQ: 5219, down 0.4% on week, up 4.2% YTD
• Russell 2000: 1238, up 0.1% on week, up 9% YTD
• 10-Year Treasury yield: 1.63 (from 1.58% week ago)
• British Pound/USD: 1.3136 (from $1.3078 week ago)
• October Crude: $47.29
• December Gold:  at $1,324.80
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.15 wk ago, $2.53 a year ago)

THE WEEK AHEAD:

Mon 8/29:

8:30 Personal Income and Spending

10:30 Dallas Fed Mfg Survey

Tues 8/30:

9:00 Case-Shiller HPI

10:00 Consumer Confidence

Weds 8/31:

8:15 ADP Private Payroll Report

9:45 Chicago PMI

10:00 Pending Home Sales Index

Thursday 9/1:

Motor Vehicle Sales

8:30 Productivity and Costs

9:45 PMI Manufacturing Index 10:00 ISM Mfg Index

10:00 Construction Spending

Friday 9/2:

8:30 August Employment Report

10:00 Factory Orders