Key takeaway from the jobs report: Beware of bears!

With the unemployment rate at falling to a level unseen since since 1969, Constance Hunter says there is good reason to believe wage gains are here to stay.

By Constance Hunter


Beware of bears! Bond bears that is. Today’s jobs report is all about the bond market which sold off all week, pushing yields solidly above 3.1%. After the jobs report, the 10-year bond is sustaining yields above 3.2%, levels not seen since 2011.

As we mentioned after the August data here, higher bond yields in response to steady wage increases suggested that term premium could be returning to the bond market. Something the Fed has been expecting but something market participants (as expressed by the forward curve) have been doubtful of. Today’s report reinforces the slow and steady wage increase story that is behind some of the move in the 10-year yield.

Yes the headline fell to 134,000 jobs added, but two things to keep in mind about that are the impact of Hurricane Florence during the survey week and the upward revision to the August data by a whopping 69,000 jobs.  Jobs growth is still averaging 201k for the past 12 months.  Additionally, we would not be surprised to see an upward revision to the September data as has happened after previous hurricanes.

With the unemployment rate at 3.7%, a five-decade low not seen since December 1969, there is good reason to believe wage gains are here to stay. The 2.8% y/y reading on wage increases is coupled with a slow rise in the one-year UofM inflation expectations survey. The most recent reading registers 3.0%y/y. Given the upward price pressure expected from tariffs, the price increases from the Wayfair Decision, and the announcement from Amazon to raise wages we would not be surprised to see consumers continue to inch higher in terms of expectations.  All this suggests upside risks to wages in 2019.

  • The bond market reaction is key. The jobs data was supportive of higher yields and we think term premium is making a slow and tepid comeback. We expect slightly higher 10-year yields in the coming year baring any shocks that derail the current expansion.
  • The Federal Reserve is on track to raise rates for a 4th time this year at their December meeting by 25 basis points taking the Fed Funds effective rate near to 2.43%.
  • This 96th consecutive months of jobs growth continues to provide tailwinds to the consumer who has, and will likely continue, to hold the torch in this expansion.  

To speak with Constance Hunter, please contact Matt Weiss from KPMG's Corporate Communications team.

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