The employment data released last week for July was stronger than expected and well above the average of the first half of the year. Jobs grew by 209,000 for the month, above the 189,000 monthly average of the past six months. The unemployment rate dropped to 4.3% from 4.4% in June. In spite of this kind of growth, wage gains were modest. Average hourly earnings only rose by 0.3%, keeping the YOY increase at 2.5%. The strong labor market is not putting upward pressure on labor costs and creating inflationary pressures. The primary reason the Fed is concerned about rising inflation is an expectation labor costs will begin to rise and these costs will be passed on in the form of higher prices. After three years of very strong job growth, this risk has not occurred.

The bond market does not believe it will. The inflation data due out this week is not expected to reflect any upward pressure on prices. The weak monthly data will leave the year-over-year increase in prices below the Fed’s target of 2%. Without inflation pressures rising, intermediate and long-term market rates will not move higher…

ProBank Austin Advisor – August 07, 2017