Job Boom Means There Is No Recession. It Also Boosts Pressure for Rate Hikes.

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Whether commuting or working from home, more Americans are on the job now than at any time since the pandemic began.

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Jonathan Alpeyrie/Bloomberg

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What happened to that “R word,” recession? The latest data make the notion that the US economy is contracting feasible. The numbers also reinforce the message from an array of Federal Reserve officials this past week: We will not relent in the battle against inflation.

News on Friday that nonfarm payrolls rose by 528,000 in July, more than twice economists’ forecasts, on top of upwardly revised job gains in the two preceding months, rendered suggestions of a downturn, well, rather ridiculous. The latest jump means payrolls also have recovered the five million jobs lost during the worst of the pandemic.

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The unemployment rate, which is derived from a separate survey of households, fell by 0.1 of a percentage point, back to the pre-Covid low of 3.5%, hit in early 2020. Part of that reflected a dip in the labor-force participation rate, although that was because of “jumpy” teenagers, according to JP Morgan’s chief US economist, Michael Feroli. And the U6 “underemployment” rate—which reflects, among others, people out of the labor force who would accept a job and those working part-time but who want a full-time gig—held at 6.7%, a record low stretching back to the series’ inception in 1994, he adds in a client note.

Related Market Data

Bonds & Rates

The jobs report followed a parade of Fed speakers with a single message: The markets shouldn’t anticipate a retreat by the central bank until it reins in inflation. A couple of regional Fed presidents, including Loretta Mester of Cleveland and James Bullard of St. Louis, suggested that the central bank’s key federal-funds target should be lifted as high as 4% eventually, well above the recently raised level of 2.25% to 2.50%, and higher than the 3.50% to 3.75% peak priced in the fed- funds futures market by year end, according to the CME FedWatch site,

Treasury yields, which had previously slid on hopes of an eventual peak and drop in Fed rates, reversed to the upside. On the week, the two-year note, the coupon maturity most sensitive to rate expectations, jumped 35 basis points, to 3.248%, while the benchmark 10-year yield rose 20 basis points, to 2.838%. This inversion of the yield curve, with the two-year 41 basis points above the 10-year, is the popular harbinger of recession. But the Fed’s preferred yield curve gauge, the three-month versus 10-year yield, remains positive by 35 basis points, although that spread has shrunk sharply. (A basis point is 1/100th of a percentage point.)

The slide in yields from their mid-June highs has been a major propellant in stocks’ advance since then.

Looking ahead, the Fed’s focus will be on inflation readings, most particularly the July consumer price index, slated for release on Wednesday. Forecasts call for a rise of just 0.2%, largely owing to the slide in retail gasoline prices, after June’s 1.3%. That would trim the year-over-year rise to 8.7%, below the previous month’s headline-grabbing 9.1%. But excluding food and energy, the core CPI is forecast to be up 0.5% in the month and 6.0% from the year-earlier level, as the underlying rise in housing costs remains robust.

Given the continued inflation pressures and the Fed’s vow to counter them, chief financial officers took advantage of the summer dip in long-term interest rates to bring some $56 billion of bond issues to market in the week through Thursday. That included technology megacaps Apple (ticker: AAPL), a frequent borrower despite its huge cash hoard, and Meta Platforms (META), the Facebook owner making its first foray into the public debt markets. Proceeds from the offerings are earmarked for general corporate purposes, including stock repurchases.

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The bond offerings came just before share buybacks were targeted by climate and healthcare legislation agreed to by the Democratic Senate leadership this past week.

Corporate finance officials have a history of propitiously timed financings. Regardless of future tax implications, their rush to borrow suggests they think credit will only become dearer. That isn’t what happens in a recession.

Write to Randall W. Forsyth at [email protected]


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