By Danny Jasper, Senior Vice President, Capital Markets

Mortgages are fading this morning after investors took the weekend to digest the relatively strong July Non-Farm Payrolls report, which showed the U.S. economy added 215,000 new jobs last month and wage growth accelerated.

Trading patterns showed investors initially interpreted Friday’s report as dovish (maybe because the participation rate didn’t improve?), or perhaps brushed it aside while commodities continued to plunge and results on industrial production in Europe raised concerns about the global economy.  Whatever the reason for a Friday bond rally was, Friday’s report keeps September as the heavy favorite for the Fed’s first rate rise.

Fischer: A large part of the current inflation is temporary

Earlier today, we had some interesting commentary from Federal Reserve Vice Chairman Stanley Fischer, who expressed some surprisingly positive sentiment on inflation.  The statement highlighted the rise in the personal consumption expenditures index last month (which appears to be the Fed’s preferred inflation gauge) and more importantly, the Fed’s thinking that “a large part” of the current low trajectory in inflation is “temporary” and “has to do with the decline in the price of oil.”

It appears the Fed is confident that commodity prices will stabilize at some point and inflation will improve, which when combined with the clearly improving labor market, would allow the Fed to feel more comfortable about their ability to raise borrowing rates while still being able to progress toward their dual mandate of maximum employment and price stability.

The  Economic Week Ahead

While not quite as full as last week, this week’s economic calendar is filled with valuable market moving data to keep an eye on.  Highlights include:

  • Tuesday’s reports on nonfarm productivity and unit labor costs
  • The Retail Sales reports for July on Thursday (which will allow investors to get their first glance at Q3 consumption, and is expected to show a +0.5% gain on the core level)
  • July PPI and industrial production reports on Friday.

We also have a full plate of government auctions to absorb, with the Fed selling $24 billion in three-year notes Tuesday, $24 billion in 10-year notes Wednesday and $16 billion in 30-year bonds on Thursday.  Auction participation — particularly on the indirect side– has been strong lately, so we’ll see if that holds up with this week’s offerings.