Here’s how the Fed is reading today’s jobs report

There are currently around two jobs available for every unemployed person, and as a result, employers have had to raise wages to attract suitable candidates.

That sounds like a good thing — and it is for Americans who are facing higher prices on everything from groceries to rent. But the Federal Reserve isn’t very happy about it. In order to fight inflation, it needs to cool the economy, and larger salaries do the opposite. Higher labor costs can also get passed on by companies to consumers, and that means higher prices.

If growth had continued to accelerate, the central bank would have more reason to aggressively hike interest rates at its meeting later this month. But we’re not out of the woods yet. Wage levels are still elevated for the year, up 5.2%.

There are a number of factors that add to higher prices — including supply chain and commodity pressures — but wages are the dominant driver of inflation moving forward, Aneta Markowska, chief financial economist at Jefferies, told me. “Rising wages are creating a significant amount of inflation. Supply chain issues are expected to ease in the next year, but we’re still left with this labor problem.”

The only way to get to the Fed’s goal of a 2% inflation rate is to see wage growth decelerate sharply, she said. A 0.3% increase is not enough of a deceleration.

Today’s report: The US unemployment rate grew to 3.7% in August, coming in hotter-than-expected. The economy added 315,000 jobs for the month, topping analyst estimates of 300,000 but marking the lowest monthly gain since April 2021. Wage growth also eased to 0.3% for the month. Wall Street had expected a 0.4% increase.

The Federal Reserve is looking for red-hot job growth to start cooling in its fight to ease inflation. The report lowered market expectations for a more aggressive interest rate hike at the Fed’s September meeting, sending stocks higher.

The numbers provided some relief from last month’s jobs report, which blew expectations out of the water. More than half a million jobs were created, the most in five months. Average hourly earnings grew by half a percent month-over-month.

In the weeks following the July jobs release, Fed officials took a more hawkish stance, saying that rate hikes would continue until inflation comes down and warning of upcoming economic “pain.”

Fed Chair Jerome Powell cited the strong labor market as a cause of inflationary concern at his Jackson Hole speech last week. “The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers,” he said.

After the last Fed meeting in July, where the central bank raised rates by a whopping 75 basis points, Powell told me that he was closely monitoring wage growth. His ultimate goal, he said, was to bring inflation down and achieve “a landing that doesn’t require a really significant increase in unemployment.” That’s only achieved by slowing wage growth.

The takeaway: Wall Street is currently pricing in a 60% chance of a 75-basis point rate hike at September’s Fed meeting. That’s down nearly 15 percentage points since Thursday, before the jobs report was released. But there’s still a lot of ambiguity around the Fed’s upcoming policy decision. There’s a lot of economic data to digest in the first half of this month — in particular, inflation numbers for August — and this is just one piece of a larger puzzle.

“The Fed will require further proof of softening before adjusting policy materially,” said David Page, head of macro research at AXA Investment Managers. “But on balance these figures are consistent with a 50-basis point September Fed hike.”

China needs Wall Street

The US and China have finally come to an agreement on one of the biggest problems in global business: How Chinese companies listed on American exchanges should be audited.

Regulators from both countries announced a deal last week that would allow US officials to inspect the audit papers of those firms. The breakthrough means that for now, more than 160 Chinese companies may have dodged the immediate threat of being kicked off the world’s biggest stock market, reports my colleague Michelle Toh.
The US is wasting no time in getting started on those audits. Reuters reported Wednesday that officials picked Alibaba (BABA), Yum China (YUMC) and other companies for a first round of inspections beginning next month.

Some background: US regulations stipulate that all companies on American exchanges must comply with requests to fully open their books by 2024 or they will be barred from trading in the United States. That’s a problem for China. The country has been hesitant to let overseas regulators inspect its accounting firms, citing security concerns. The tension has already led some Chinese companies to retreat from US markets.

Alibaba, whose shares have traded on the NYSE since 2014, outlined plans this summer to upgrade its Hong Kong listing to primary status, which it expects to take place by the end of this year.

Why it matters: The long list of companies at risk goes beyond Alibaba and includes some of China’s top tech giants like Baidu (BIDU)give JD.com (JD).

The impending audit deadline has already led to a slowdown in share issues. US IPOs by Chinese companies have slumped significantly, with eight so far this year compared to 37 in the same period last year. The value of those deals has also shrunk. So far in 2022, companies have raised just $332 million through IPOs on US markets, down from nearly $13 billion a year ago.

The odds: This deal is just a first step in formalizing the audit protocol between the US and China. It’s still unclear if China will actually comply. Last week, SEC chief Gary Gensler warned that companies still faced ejection if their papers could not be accessed by US authorities. “The proof will be in the pudding,” he said in a statement.

Analysts at Goldman Sachs said this week that there’s still a 50% chance of Chinese shares getting delisted.

Either way, this isn’t likely to have a big impact on other contentious issues standing between the US and China. But it does mean that China needs Wall Street. “The US-China relationship reminds me of conflict-ridden relationships where at the end of the day, they realize they can’t afford to get divorced,” said Drew Bernstein, co-chairman of Marcum Asia CPAs, an accounting firm for Asian companies looking to enter US markets.

Anyone want to buy Zoom?

I don’t need to tell you that the work-from-home boom is going bust. The dust collecting is yours The peloton (PTON) already did.

Now, the return-to-work era is cornering its next victim: Zoom.

The pandemic darling’s weak earnings outlook and plunging stock price raise the question of whether or not the video conferencing company is a one-trick pony that needs to be part of a larger tech firm, reports my colleague Paul R. La Monica.

It may have trouble finding a suitor, though.

Zoom (ZM) has to contend with several larger tech giants that already have similar products. Microsoft (MSFT) operates Teams and Skype. Cisco (CSCO) has WebEx. Google (GOOG) owner Alphabet runs Meet and Chat. Apple (AAPL) has FaceTime.

That leaves four other possibilities.

Meta (FB) could incorporate Zoom into its messaging and social media apps. If Salesforce (CRM) combined Slack and Zoom they’d create a mega-productivity platform. Oracle (ORCL), the business software company, has a reputation as a serial acquirer and has been looking for a way to expand into video. There’s also private equity. Zoom execs might enjoy being released from the quarterly earnings report whims of Wall Street.

For now, Zoom is remaining mum on any acquisition prospects, or maybe it’s just on mute.

Up next

The US jobs report for August posts at 8:30 am ET.

Coming next week: US markets are closed Monday for Labor Day. We’ll take a break that day and see you back here on Tuesday.

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