The view among many in the markets is increasingly shifting to one in which Fed rate hikes are working as intended. This week, key labor data suggests that interest rate hikes are putting the crimp on the labor market, leading to the softening that the Federal Reserve has sought out. Accordingly, Treasury yields have come down. That’s something InvestorPlace’s Louis Navellier has pointed out could mean the Fed won’t raise rates moving forward.
The most recent August ADP report, which measures payroll growth on a monthly basis, showed that job growth slowed to 177,000 jobs added in the month of August. This was the slowest job growth number reported by private employers in some time and far weaker than expected. For context, 371,000 jobs were added in July and economists had predicted that around 200,000 jobs would be added in August. Thus, it appears employers are pulling back on their hiring near-term, with uncertainty building around the economic outlook moving forward.
Additionally, the JOLTS report, which measures the total number of job openings in the market, showed there were 8.82 million openings in July. This number was noticeably lower than the 9.46 million that economists had expected. It also came in far below the 9.16 million reported in June (which was revised lower from 9.58 million initially).
Overall, these weak jobs reports suggest that some slack is building in the labor market. Let’s dive into what investors should make of the news.
Fed Rate Hikes Working as Intended
The goal of the Fed raising rates to the degree that it has over the past year has been to dampen demand for goods and services, while adding pressure to the labor market, in order to avoid a so-called wage-price spiral. Some economists believe that rising wages lead to higher prices, which forces wages even higher and so on. By putting the crimp on wage growth, the Fed is hoping to engineer a “soft landing” in which job losses will be minimized but inflation will drop toward its 2% target.
These labor readings have flowed through to the Treasury market, which has seen yields fall sharply across the curve. Lower yields correspond to higher prices, meaning demand for bonds is increasing as investors bet on rate hikes as more likely in the near future. If a soft landing is achieved, the thinking is that the Fed could be in a position to take rates lower to make monetary policy less tight, leading to lower yields across the curve.
It’s likely far too soon for anyone to declare victory just yet. However, it’s remarkable the degree to which these rate hikes appear to be working as intended. Of course, we’ll have to see more data come in that looks like what we’ve just seen from these labor reports. But considering what we’re seeing right now, there are some sincerely encouraging signs forming.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
