The growing divergence in hiring trends across sectors suggests that the labor market shift we expect is underway.
The jobs report came as close to consensus expectations as it gets and overall did not change the outlook for another 75 basis point Fed hike in November, which targets a rate 4.5 to 5% before taking a break.
Non-farm payrolls slowed slightly, from 315,000 in August to 263,000, still above trend. Combined with a slight decline in the labor force participation rate, which had strengthened in August, this was enough to push the unemployment rate back down to 3.5%. The silver lining for Fed officials is that the AHE (Average Hourly Wage) was weaker than expected (+0.3% MoM vs. 0.4% MoM), although wages continue to rise. increase at the too high rate of 5% year-on-year and 5.75% for non-executive workers.
We think the most interesting part of the report is the growing divergence in hiring trends across different sectors, suggesting that the labor market inflection we expect is underway.
Attention now turns to the September CPI report. We expect another strong reading for core inflation (0.5% m/m). Core inflation above the central bank’s target now looks more entrenched, and while headline inflation is still likely to moderate over time on our cyclical horizon, this should take time.
The rise in inflation has extended beyond the categories affected by the pandemic-related disruptions in global goods production to include components of the consumer price basket that tend to be more cyclical, including the housing and services. In addition, measures of longer-term inflation expectations have been on a general upward trend, on a net basis, over the past two years, as labor market tightness has pushed wages up.