Jobs Report Puts Rate Hike on Hold

It looks like September is off the table. Last week, Federal Reserve Governor Jerome Powell speculated that September might bring the first increase in the federal funds rate since 2006. That appears unlikely. Indeed, most Wall Street traders point to December as the “new” earliest date for a rate increase.

Though only one month's worth of data, the June employment report is a contributing factor to the push back. On the surface, everything appears sound. The economy created another 223,000 jobs. It's always good news when the economy creates 200,000+ new jobs a month. It's also good news when the unemployment rate falls, as it did last month. The unemployment rate dropped to 5.3% from 5.4%.

When you did a little deeper, though, you find the news is somewhat less cheery. Average hourly earnings continue to stagnate. For the month, the average rate was $24.95, the same as in May. Year over year, wages are up 2%. This is on par with annual wage growth since the recession ended five years ago. During a recovery, wages usually grow at a much strong rate.

As for the unemployment rate, it's somewhat misleading. Fewer people are in the workforce. The participation rate – the share of working-age people wanting to work – decreased to 62.6% in June, the lowest since October 1977. To be sure, aging baby boomers are leaving the workforce, but there is also a swell of working-age people who've left the workforce out of frustration.

When you take a lackluster jobs report and add to it the events in Greece, December becomes the odds-on choice for a fed funds rate increase. (We still think 2016 is more likely.) That said, the fed funds rate mostly influences short-term rates. Credit-market participants have taken over long-term rates, and they are on the rise.

With everything going on with Greece (namely Greece's inability to meet its debt obligations and its possible expulsion from the European Union), U.S. Treasury rates would normally fall. Investors faced with heightened uncertainty usually pour into U.S. Treasury debt. That hasn't been the case this go-around. The yield on the 10-year Treasury note continues to hold near 2.4%. Because the 10-year note influences mortgage rates, the 30- and 15-year fixed-rate loans continue to hold near 2015 highs.

Fortunately, higher long-term lending rates haven't taking any steam out of housing. Momentum remains strong. The Pending Home Sales Index was up 0.9% for May, which beat most estimates. The latest increase pushes the index up to 112.6, the highest it's been since 2006.

The prospect of even more home sales in the face of higher lending rate is testament to the underlying strength in housing. We expect strength to be maintained into early autumn, and likely beyond.

Information provided by Jessica Regan.

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