MBS Live Recap: Wage Growth Breakout Prompts Bond Yield Breakout

Today's bond market wrap is as simple as the headline.  Average hourly earnings or AHE is occasionally responsible for some impressive moves in bonds.  Today was one of those days.

Part of the problem was that there wasn't really any weakness in the payrolls number to offset the wage gains.  Granted, previous months had some downward revisions, but the biggest one was all the way back in June.  July's revision was then perfectly offset by August's 'beat' (i.e. -10k revision to last month and today's NFP beat the forecast by 10k).

All that to say that there was some extra focus reserved for any other standout line items in the data.  Average hourly earnings stood out because August's numbers took the annual numbers past an important ceiling, 2.9% vs 2.8%.  We've seen breaks above 2.8% on several occasions in the past 2 years, but in every case, revisions restored the ceiling.  Today's report provides the most recent chance.

Wages are a hot topic recently, largely due to the Fed's increased discourse on the topic.  Past precedent and academic models suggest that wages should be rising faster given the low unemployment rate and labor shortages in several key sectors.  An absence of wage growth is one of the things the Fed cites as a reason to be more cautious when it comes to raising rates.  Thus, if wage growth overcomes hurdles like 2.8%, the Fed and the broader bond market have to do more to account for the risk that higher wages translate to higher inflation.  And higher inflation means higher rates.