The robust July labor market report may put together the Federal Reserve to roll again its bond buy program

Louisville Urban League employees speak to job seekers at a Job News USA careers fair in Louisville, Kentucky, United States, on Wednesday, June 23, 2021.

Luke Sharrett | Bloomberg | Getty Images

The strong July jobs report puts the Federal Reserve on track to slow its bond purchases – if the spread of Covid-19 doesn’t hurt the economy and attitudes later this summer.

The setting was the fastest pace in a year. The economy created 943,000 jobs in July, nearly 100,000 more than the Dow Jones consensus estimate. The unemployment rate also fell to 5.4% and thus exceeded the forecast unemployment rate of 5.7%. Employment in May and June was also revised upwards by a total of 119,000 employees.

“This is a good number that is making the Fed rejuvenate,” said Grant Thornton’s chief economist Diane Swonk.

Fed observers expect the central bank to officially announce at its next meeting that it will cut its $ 120 billion monthly bond purchase program, which was put in place to prop up the economy through the pandemic. Market professionals also expect the central bank to start cutting its asset purchases in late 2021 or early 2022.

The S&P 500 and Dow Jones Industrial Average rose while government bond yields rose higher. The 10-year yield rose to 1.28% after hitting a 1.13% low earlier in the week. Bond yields move in the opposite direction to prices.

“There’s a lot to like about that number. It seems stocks like them. … The dollar and interest rates have risen, and that suggests that investors think numbers like this may lead the Fed to at some point to do something, “said State Street Global Advisors chief investment strategist Michael Arone said.

Work towards “significant progress”

The central bank has announced that it would like to see “significant progress” towards its economic goals before it is ready to cut back on its government bond and mortgage purchases. Recently, Fed chairman Jerome Powell said the Fed would like to see some strong employment reports as evidence that the job market is recovering.

Tapering this program would be a first step towards a final rate hike that the Fed has forecast for 2023. The gradual withdrawal of security purchases is expected to take 10 months or more.

“The timing will depend heavily on Covid. I still think they will make it by the end of the year,” said Swonk. “This is a pre-Covid report and these are the gains we want, even with upward revisions.”

Some market pros have expected that a strong employment figure could signal that the Fed will make an announcement as early as September and then cut its buying later this year or early next year.

“It looks like you are continuing to make significant progress. That’s a good number,” said John Briggs, head of strategy for NatWest Markets. “I think it means to me that September is still on track for the Fed to talk about tapering. I think if you get another figure like this in the September report, you will make significant progress achieve.”

Sectors that dominate employment growth

State Street’s Arone said with jobs growing averaging over 800,000 in recent months, it will take about seven months for the labor market to recover from its pandemic losses. “It is in line with many investors’ expectations” for the Fed to begin tightening, he said.

Grant Thornton’s Swonk said the composition of the job gains show real progress for the economy, which is still more than 5.7 million payrolls from pre-pandemic levels in February 2020.

“It was dominated by all of the sectors we expected – education, leisure, and hospitality. Movies are coming back. Everything hit hardest by the pandemic, ”she said. “Also some encouraging signs from the mining industry, which means we could get some relief on oil prices. Not only do we hire workers, we also have workers. The participation rate increases. We lost half a million from the roles of the long-term unemployed. “

Employment in the leisure and hospitality industry rose by 380,000, but employment in this sector is still 10.3% below its February 2020 level.

“The transport numbers have developed pretty well and manufacturing has developed in a good trend over the past few months. That suggests to me that some of the supply chain bottlenecks are gradually easing, ”said Arone. The transit and ground passenger transport sectors added 19,000 workers and the manufacturing sector added 27,000.

The Fed has blamed supply chain congestion for the recent surge in inflation. The Fed has downplayed rising inflation as temporary.

But economists watch wage inflation especially because it is stickier than other inflation rates.

According to the job report, the average hourly wage for the month rose 0.4% and rose 4% year over year, more than expected. Economists have been watching this number closely as inflation has risen across the board in recent months.

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