By Danny Jasper, Senior Vice President, Capital Markets

This morning’s Non-Farm Payrolls (NFP) report for July showed signs of further improvement in U.S. labor market conditions and should keep the Federal Reserve on track to initiate their first rate increase at the next FOMC meeting in September.

U.S. employers added 215,000 new jobs in July, slightly below consensus estimates of 225,000, but good enough to support Atlanta Fed President Dennis Lockhart’s statements earlier this week that it would take a “significant deterioration” in labor market conditions to convince the Fed to hold off on their first rate increase past September.

May and June were revised higher by 14,000 from previous estimates, so the net amount of jobs added was slightly above estimates for a total of 229,000 new jobs.  Private payrolls were up 210,000, government jobs were up 5,000 and the manufacturing sector added 14,000 net new employees.  The three-month average is now up to 235,000, which is the highest rate since February.  The unemployment rate held firm at 5.3%, and average hourly earnings were up a solid 0.3% month-over-month and 2.2% year-over-year.  The labor force participation rate was unchanged at 62.6%, holding steady at the lowest level in the last 40 years.

First Rate Increase on Track for September

All in all, the NFP report wasn’t great, but it was still good enough to keep the Fed on track for executing their first rate hike next month.  However, this report does not put the Fed in a position to increase rates at a faster-than-expected clip.  Many investors have already come to the realization that an increase either next month or in December was inevitable and focus had shifted a bit to the rate of change post the initial increase.

Today’s report only proved that the labor market is steady, but not that it is making up for all of the other weaker economic factors currently in play like slow inflation, crashing commodity prices and global economic softness, which will likely mean the Fed will be extremely cautious in the rate of further increases.

Traders appear to have taken solace with that rationale this morning, as even with virtually everyone now convinced that the Fed will move in September, treasuries are actually rallying and now sit at sub 2.20% levels.  Short-term yields have risen and the yield curve has flattened today, but investor reaction to today’s report has been bearish.