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NEW YORK (Reuters) - U.S. job growth surged much more than expected in July and the unemployment rate ticked lower, giving the Federal Reserve enough cushion to stay on its aggressive rate hike path as it tries to tame inflation.
Nonfarm payrolls increased by 528,000, the Labor Department's employment report showed on Friday. June was revised upward to show payrolls rising by 398,000 instead of the previously reported 372,000. Economists polled by Reuters had forecast 250,000 jobs added last month.
Employers continued to raise wages at a steady pace last month. Average hourly earnings increased 0.5% in July after gaining 0.4% in June. That increased the year-on-year increase to 5.2% from 5.1% in June.
STOCKS: S&P e-mini futures dropped sharply, last down 1.0%
BONDS: The yield on 10-year Treasury notes shot higher and was up 14.9 basis points to 2.825%; The two-year U.S. Treasury yield, was up 20.3 basis points at 3.240%.
FOREX: The dollar index jumped and was last up 1.116% at 106.880
DEAN SMITH, CHIEF STRATEGIST, NEW YORK-BASED FOLIOBEYOND
It’s a blockbuster number. It really clears the path for the Fed to continue with the hawkish viewpoints that have been expressed recently, that they need to continue to really press on inflation."
"I think a 75 basis points hike in September is most likely.
We have a real supply-demand imbalance in terms of the labor market… There was a strong urge for people to call the all clear, on inflation and we’re just not there. Inflation is becoming more embedded and it’s actually accelerating, not decelerating."
SAMEER SAMANA, SENIOR GLOBAL MARKET STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE, ST. LOUIS
"It's what we feared, which is that the labor market is going to take much longer and much more Fed action to cool down than expected. That means there's not going to be a Fed pivot anytime soon. The pivot party is now over."
"They're not going to cut interest rates in the first half of next year as the market had hoped. Every metric was hotter than expected, top line wage growth accelerated and unemployment fell. Average hours rose showing more demand for labor. That participation rate fell. That means you've less workers, more demand and therefore higher wages."
"We partied much too hard coming into this number and there's going to be a hangover."
AXEL MERK, PRESIDENT, CHIEF INVESTMENT OFFICER, MERK INVESTMENTS, PALO ALTO, CALIFORNIA
"This is a much stronger report than was expected... What it means is the Fed cannot pivot at this point. The Federal Reserve has to continue to hike rates. The folks who are saying let's take it more slowly are being shoved aside here with this report. That said, it's not quite as strong as what was suggested by the headlines."
SHAWN SNYDER, HEAD, INVESTMENT STRATEGY, CITI U.S. WEALTH MANAGEMENT, NEW YORK
“This suggests among some other data that the U.S. economy is not in a recession. To me it doesn’t necessarily confirm that one will ultimately be avoided. But yes, this is a really strong number. But I think the market is going to react to it today that maybe the Fed goes ahead with 75 basis points."
“We can’t forget about next week’s CPI print, that will be really important to determine how the Fed views the economic data over the past week, because if inflation actually did peak and it comes down in the July report, from say 9.1 to 8.8, then that’s the best-case scenario. You have inflation coming down, the economy holding up, that in theory should increase the odds of a softish landing."
“We can’t just strip out the employment report from the inflation report, they need to be viewed together, particularly with it being such a critical moment in determining Fed policy.”
RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA, NEBRASKA
"Today's number is extremely impressive and is another reminder just how strong this economy is. It likely is telling us that the hiking the Fed is doing, the economy is withstanding it, surprising many who thought the economy would weaken. You have to be impressed with the resiliency of the U.S. economy once again."
"We saw yields spike again as the strong data confirmed the Fed could remain a little more hawkish and we have a near term sell off in equities, but nothing major. Honestly August tends to be a little more volatile because there's less volume so you can get some big moves. All in all, after a 9% rally last week, S&P is virtually flat so you got to say that's a nice job of holding those gains and this earnings season overall has been positive and the labor market continues to surprise nearly every economist to the upside."
"We wouldn't say much higher (chances of Fed aggressively hiking rates). But the strength of the economy opens the door that what the Fed has been saying that the economy can withstand higher rate hike. So if inflation remains stubbornly high that opens the door for the Fed to be a little more aggressive because again the economy likely can withstand it."
"This is just another solid reminder that we're not in a recession. That's probably still more of a positive thing than not. No matter what Fed policy is, let's keep the economy growing and that's still a major tailwind eventually for equities to continue to bounce back this year."
SAM STOVALL, CHIEF INVESTMENT STRATEGIST AT CFRA RESEARCH, NEW YORK
"Inflation is likely to remain sticky for longer. With that many more people working, there's that much more money that's going to be earned to chase after these goods to drive the inflation… but elevated inflation readings will likely remain with us for longer than anticipated. We can now hear Fed Chair Powell's voice echoing in our heads, saying that the stronger than expected jobs report implies that the economy can indeed withstand higher rates."
"We were approaching the 50% retracement level on the S&P 500, which is important because no bear market since World War II ever reached the level, only to then establish an even lower low. We came close but did not hit that level. August's markets personality will come through once again as being the third highest month in terms of volatility and that sets up the market for a very cautious September as well."
"While next week's numbers will imply that the peak is in, in terms of inflation, because we're looking for an 8.8% year on year rise versus the prior reading of 9.1%, initially, one could look at that as positive news, but now investors might say, it could simply be a dip before an even higher reading down the road."
MICHAEL PEARCE, SENIOR US ECONOMIST, CAPITAL ECONOMICS, NEW YORK
"The unexpected acceleration in non-farm payroll growth in July, together with the further decline in the unemployment rate and the renewed pick-up in wage pressure, make a mockery of claims that the economy is on the brink of recession. This raises the odds of another 75 basis point rate hike in September, although the outcome depends more on the evolution of the next couple of CPI reports."
ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY, NEW YORK
"Anyone that was inclined to jump onboard the pivot train is likely to jump off at the next station. This is not indicative of a Fed that will need to shift gears next year and start cutting (rates). The pivot narrative has been put to bed. But this doesn't preclude the Fed from downshifting to 50 bps in Sept.”
"This is good news. Market may have a negative reaction in a knee-jerk fashion but we want people working and the labor participation rate to go higher. There are two ways of stay out of recession and one of those is for jobs to continue to grow and consumers to continue to spend."
"As it pertains to the labor force, it's never felt like we were going into a recession. You could certainly see a recession sometime in 2023 but it's certainly not knocking on the door right now, not with these many jobs being created on a monthly basis. Last month's number was revised higher as well. It's a strong report and the rumors of a recession have certainly been exaggerated."
"There is some time between the next Fed meeting. Anyone that extrapolates what the Fed is going to do based one data point between now and September is getting ahead of themselves."
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN
"The headline number is really impressive, but maybe that’s more style over substance. The number of multiple jobholders shot up more 559,000. Is some of the employment strength superficial and just because people are trying to work more in order to make ends meet?"
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
"Payrolls were nearly double the amount we were looking for. There's nothing to suggest this report this weak at all. Unemployment actually went down to 3.5%."
"This is very hot employment data. It means the Fed is going to continue to raise interest rates. Bonds are getting crushed. Stocks are coming down."
"The bottom line is this gives the upper hand to the Fed, which says we're not in a recession yet and the Fed will probably tighten. If we get one more number like this in August, the Fed could hike by 75 basis points in September rather than 50 basis points."
"I'm surprised in the strength in wage growth, I was looking for a cooling off. That's the key to the report. That's why we’re seeing a sell off in the bond market and it proves that inflation is still a big problem."
PAUL NOLTE, PORTFOLIO MANAGER AT KINGSVIEW ASSET MANAGEMENT, CHICAGO
"What we've heard from the various Fed governors this week about it being too early to pivot away from a tightening policy is definitely in place with the jobs report that is THIS hot."
"When you look back at the period from 2015 to 2019, the average jobless jobs gain was 190,000, and the unemployment rate was north of 4. We're well below that as far as the unemployment rate, and certainly we've been averaging 200,000 to 300,000 new jobs going forward, so the job market continues to be much hotter than historically normal times. So it gives the Fed reason to continue to raise rates. And that is what's got the market on edge."
"The number's not a surprise. There were some hints at it from some of the Fed governors. The inflation numbers next week will complete that picture. The inflation rate will come down, my guess is we get down to maybe 5% or 6% by the end of the year. But the hard part is going to be getting from that 5%, 6% to 2%. That's going to require a more aggressive Fed. So the Fed is still on target to raise rates, 75 basis points makes sense in light of the data, and they will continue at each of their meetings through the end of the year."
(Compliled by the global Finance & Markets Breaking News team)