A strong jobs report caused yields and mortgage rates to rebound sharply last week. Nonfarm payrolls increased by 254,000, marking the strongest gain since March. The unemployment rate also fell again, dropping to 4.1% from 4.2% in August and 4.3% in July.
Wage growth remains robust. Average hourly earnings rose by 0.4% in September, only slightly below the 0.5% increase from the previous month. Year-over-year, wages are up nearly 4%, ticking up from 3.9% in August.
This strong wage growth is a positive for households. As wages outpace prices, consumers’ purchasing power improves. At the same time, rising labor productivity supports business profits, and stock market gains are broadening.
The combination of rising incomes, growing wealth, and easing financial conditions will boost private demand. Stronger private demand, combined with ever increasing government spending, could lead to aggregate demand heating up again.
Can the supply side keep up with demand?
A growing labor force and rising productivity are expected to lift potential GDP and help alleviate inflationary pressure. However, questions remain: Can we rely on continued labor force growth from immigration, or was the recent increase temporary? Will efficiency gains from remote work and AI be sustained? Will the surge in new business creation persist or fade?
The ability to work from almost anywhere, advancements in AI, and renewed business dynamism are key drivers of productivity improvements. As we approach the election, sustained productivity growth would also offer some fiscal leeway for the big spenders in Washington. However, with fiscal deficits already high and expected to rise further, the positive impact of a productivity boom on inflation could be offset.
This week’s release of the consumer and producer price indexes will be critical. It will reveal whether inflation is still trending in the right direction.
In August, core inflation – measured by the consumer price index – accelerated. Core prices increased at an annualized rate of 3.4%, up from 2% in July, exceeding both the three-month and six-month averages. On a year-over-year basis, core prices are up 3.3%.
How restrictive is Fed policy?
While the base case remains that the Fed is likely to lower the policy rate again, the case for no further rate cuts is gaining traction. Traders have shifted from pricing in a 32% chance of a 50 basis point rate cut at the next FOMC meeting to a 0% chance. The probability of no rate cuts is low but rising.
