We have received employment data, which we see that not only the headline data, but also the details do not create a comfort zone. A July employment of 528K, well above the median estimate of 250K, and the expected unemployment rate of 3.6% to evolve to a point in line with the full employment quota of 3.5%, in the data that significantly exceeded expectations. Both total nonfarm payrolls and unemployment rate returned to pre-pandemic levels in February 2020. These data show that the labor market has not eased on the contrary, it continues to tighten, which are sufficient reasons for the Fed's not backing out of rate hikes.
If we look at the sub-items; The wide-ranging unemployment rate of 6.7% continues in parallel with the previous month. The participation rate has decreased from 62.2% to 62.1%, which actually seems to meet the exit due to job seekers finding a job. However, in terms of drawing the limits of growth, it points to a trend that will affect the employment survey pool. This will mean that employment growth will lose pace in the future. In July, the average working hours for all employees in the private sector was 34.6 hours for the fifth month in a row, and the previous data was likewise revised upwards to 34.6. The increase in full-time employment and increased working hours indicate a level increase that can be interpreted as positive in terms of growth and production.
Job growth was widespread, led by gains in leisure and hospitality, professional and business services, and healthcare. In July, entertainment and accommodation added 96K jobs (+74K catering). Healthcare employment increased by 70K in July. Public employment increased by 57K in July, but is below the February 2020 level by 597K. During the month, local government employment increased by 37K, mostly in education. Employment in the construction industry increased by 32K in July. Manufacturing employment increased by 30K in July. Retail employment increased by 22K in July, although it has not shown a clear change since March. Employment in financial activities continued to rise in July (+13K).
Now, let's look at the details that are most important for the Fed and that will keep the rate hike schedule high: In July, the average hourly earnings of all workers in the non-agricultural sectors rose 0.5% to $32.27. Average hourly earnings increased 5.2% over the last 12 months. As the detail of wage increases that keeps inflation alive, it will be a detail that causes the Fed to not be comfortable and not take a step back from 75 bps. Since wage increases have not lost momentum, the interpretation that the tightening has already pushed inflation down is dubious. Especially in the service sector, if costs are rising, inflation has not yet peaked and the Fed needs higher interest rates to reduce demand inflation. As a matter of fact, there are no easing business conditions in interest-sensitive sectors, so the Fed will continue to move forward.
In terms of the Fed; Swaps now show that a 75 basis point Fed rate hike in September is more likely than a 50 basis point increase. In addition, the terminal rate of 2.5% and the Fed policy rate, which will probably be 3.5% at the end of the year, put the interpretation that interest rates would decrease next year in a logical framework. The dose, duration and destination of tightening will be the subject of serious discussion at the September FOMC. Therefore, this perspective is negative for the market in the short term, and the phenomenon that will ease the situation is that we will see another employment report (August data) and inflation data before the FOMC in September. Of course, it is important to have strong data that provides the condition that the US economy is not in recession. That's not exactly what the Fed wanted to see. The job market isn't getting colder, it's getting warmer.
Kaynak: Tera Yatırım
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