The Goldilocks Jobs Report of August

The recently released jobs report for August has left many wondering if they are witnessing a fairy tale come to life. While the S&P 500 index didn't show much reaction to the data on Friday, it still managed to end the week with a 2.50% increase. Similarly, the Dow Jones Industrial Average rose by 1.43% and the Nasdaq Composite gained an impressive 3.25%.

These gains are a direct result of the numbers presented in the report. The U.S. government data reveals a larger-than-expected addition of 187,000 nonfarm payrolls in August, accompanied by significant downward revisions for the previous two months, resulting in a total of 110,000 fewer jobs reported initially. Consequently, the three-month average job growth fell below February 2020 levels, sitting at around 150,000. On the other hand, the unemployment rate experienced a jump from 3.5% to 3.8%, while the labor-force participation rate saw a 0.2% increase - its first since March. Additionally, although there was a slowdown in the monthly gain of average hourly earnings, the average hours worked went up.

When all these details are combined, an encouraging picture emerges - the labor market is gradually rebalancing itself in a healthy direction. The U.S. economy continues to witness job creation, and the increase in unemployment can be attributed to a rise in the labor supply rather than mass layoffs. Furthermore, employers now have a larger pool of available workers for their open positions, and wage pressures are beginning to ease. Even the Federal Reserve should find reason to be content with these developments.

According to Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, "If the economy can sustain its expansion while the labor market cools down gradually instead of rapidly, then the Federal Reserve can comfortably maintain the current interest rates and patiently wait for the existing higher rates to take effect."

Stocks Poised for More Gains in the Near Term

The current data and market setup indicate that stocks are likely to see more gains in the near future, at least until the September Federal Reserve meeting. As the market gradually prices out expectations of interest rate hikes by the Fed, bond yields could move lower, reversing some of the upward movement seen in August, which had weighed on stocks. This process is already underway, as evidenced by the two-year Treasury note yield closing at 4.87% on Friday, down from 5.05% at the start of the week.

According to David Russell, the global head of market strategy at TradeStation, investors now have more reason to believe that the surge in Treasury yields observed in August was merely a reflection of historical patterns rather than the beginning of a new trend. Russell suggests that if yields continue to ease, it could support the narrative of a "Goldilocks" scenario and draw comparisons to the soft landing experienced in 1994-1995.

In terms of upcoming market-moving data, investors and policymakers will be closely watching the release of the August consumer price index on September 13, just before the Fed meeting. This data will provide insights into whether the loosening labor market is having an impact on inflationary pressures. It is important to note that the report may be somewhat turbulent, as summer rallies in commodities prices might contribute to an increase in the headline CPI figure. However, unless there are any unforeseen negative surprises, it is expected that stocks will continue to rise in the near term.