August jobs numbers overstate economy's strength, says Moody's Mark Zandi

Summary

Mark Zandi argues the August jobs report overstates labor market strength, with underlying job growth around 50k and wage growth slowing below inflation. He expects a hot headline CPI due to energy prices but a soft core CPI and anchored inflation expectations. Zandi concludes the Fed should hold rates steady rather than hike or cut, and warns that cutting rates could push long-term yields above 5%.

• August payrolls were strong but noisy and overstate underlying labor market strength.
• Underlying monthly job growth is estimated at about 50k.
• Wage growth is decelerating and has fallen below inflation, signaling labor market slack.
• Headline CPI is expected to be hot due to higher oil, gasoline, and diesel prices.
• Core CPI is expected to be soft, around 0.1-0.2% monthly and 2.3-2.4% year-over-year.
• Inflation expectations and breakevens remain anchored.
• Zandi says the Fed should hold rates rather than raise or cut them.
• He argues cutting rates would be counterproductive and could push the long bond above 5%.