On first, second, and even third glance, an incredibly strong report.

Headline jobs 162k! Last month’s -23k turned into +21k as part of 55k of upward revisions.

The 3-month average is at 71k, well above what most economists consider the “replacement” rate (supposedly around 50k given lack of immigration and population growth).

Private payrolls grew 127k this month and 71k last month (always great to see private sector jobs driving the report).

Hourly earnings remained “stable” at just over 3%, which is good for workers and not bad for employers. Hours worked nudged higher, a further indication that the strength is real.

The unemployment rate remained steady at 4.1%, but “steady” is a conservative interpretation, as labor participation edged up 0.2% and the underemployment rate dropped to 7.7%. You need to go back to January 2025 to get a lower underemployment rate! That is all because the Household Survey added 569k jobs!

The “birth/death” model (which is always worth checking out) was “only” 74k. A number that seems in the right order of magnitude.

The President seems highly likely to complain later today that the bond market is stupid, because he already argued this week (or last week, or both) that good data should be good for bond yields. It is good for credit spreads but is not going to help on bond yields.

The Fed

Those looking to hike rates will have a stronger argument to hike (or at least one argument against hiking that they no longer need to contend with).

Those looking to hold steady will be able to argue that the volatility in payrolls means we shouldn’t overreact (garbage in, garbage out).

• I do like the argument that looking at “annual” numbers can be misleading on the inflation side. If you take the last 12 months, we have 3.3%. If you take the last quarter and annualize it, we drop to 3% and if you take the last two months and annualize it, we are at 2.4% (maybe some of the lags and the garbage in/garbage out are finally coming out of the data). Truflation “core” is down to 1.3%.
• With plenty of “chatter” that the President is looking at exits for Iran, we shouldn’t be hiking because of higher energy costs (it is difficult to see how hiking solves that problem at all).
  • Good for lower oil prices. The reality is that the recent strikes on Iran were limited in scope (hitting launchers that were set to send more mines into the Strait and other coastal command and control capabilities). That is consistent with the U.S. attempts to keep the Strait clear (which is something CENTCOM has stated).

For those looking to cut, well, I’d like to have some of whatever they are having, because it has to be some pretty good “stuff.” 😊 Seriously, I cannot imagine anyone in the cut camp for this meeting, given even an optimistic take on inflation.

Rates

The front end will continue to march to the beat of the data and the tone of the Fed. I think you buy 2s whenever WIRP gets too close to 2 hikes for the end of January meeting, and for now, reduce risk whenever WIRP for October gets to under 0.5% (good trading ranges, until we get more clarity).

I remain in the no HIKE camp for the year (and likely CUTS before HIKES), but the data remains volatile.

For the long end of the yield curve, only one thing matters: SUPPLY AND DEMAND! Okay, I guess supply and demand are two things, but they go hand in hand.

• Norway announces reductions in allocations to sovereign debt. The Saudis are looking for loans, so presumably buying fewer Treasuries (according to TIC data their holdings have dropped from $160 billion to $142 billion since the war started). Japan, with over $1 trillion in Treasuries, has seen their holdings decline, and presumably they won’t be buying a lot of Treasuries while trying to strengthen the yen (a policy move supported by Bessent). No idea what Canada or the EU will do, but difficult to imagine them adding to Treasury holdings while trying to raise money to support defense and infrastructure spending.
• Corporate Debt Issuance. August was literally insane. August wasn’t even that slow on the equity side of the equation, but it was humming along full throttle on the credit side of the business. Tuesday could be epic for IG new issues! While many companies tapped markets in August to get ahead of the September rush, there will still be plenty of paper hitting markets. I continue to like being heavily overweight corporate debt vs Treasuries. There is a lot of dry powder as people prepare for the new issues to come, but no matter how you slice it, there is a lot of supply (especially longer maturity supply) to come.

I think the long end will underperform, with that underperformance starting later this morning as companies execute “yield locks” ahead of issuance and market participants get jittery about the deluge of paper coming.

Have a great long weekend!

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