Daily Comment (October 7, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] Global equity markets are mixed this morning.  The EuroStoxx 50 is trading lower by 0.5% from the last close.  In Asia, the MSCI Asia Apex 50 closed lower by 0.3% from the prior close.  Chinese markets are closed for the Golden Week holiday.  U.S. equity futures are signaling a lower opening.

Happy employment day Friday!  We cover all the information below, but the quick overview is that the data was fairly close to expectations.  Non-farm payrolls rose 156k, a bit weaker than the 175k forecast.  Revisions subtracted 7k from the current number.  The unemployment rate ticked higher, to 5.0% from 4.9%, and was higher than expected.  However, this was a “good” rise in the unemployment rate because it came from a 444k rise in the labor force along with a 354k rise in employment as measured by the household survey.  Simply put, more Americans returned to the labor force, most likely because economic conditions have improved enough to encourage a return to work.  Wages grew by 2.6%, in line with estimates.

Overall, the data is such that one could make a good argument for holding monetary policy steady.  In fact, it’s almost a “goldilocks” report.  The payroll number was strong enough to show no danger of recession but weak enough to reduce the threat of overheating.  The worry is that low unemployment will eventually push wages higher and cause inflation.  The great unknown is whether the low level of employment participation represents people who are permanently out of the labor force or more of a “reserve army of the unemployed.”  If the former is true, the Fed should move rates higher now.  If the latter is true, there is still slack in the economy and moving rates too quickly will snuff out the expansion just when it is encouraging labor market participation.  Given the divisions on the FOMC, we expect a modest “one and done” tightening in December.

But, before we jump into the employment report, we have to take some time to discuss one of the more bizarre events overnight when the British pound plunged.

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