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Signs of wage inflation spur higher yields

A strong monthly payrolls report caused rates to spike on Friday, leaving Treasury yields higher by 5-8 bps for the week.  The report reaffirmed expectations for another 25 bp rate hike at the Federal Reserve's FOMC meeting at the end of this month.  The addition of 201,000 jobs in August beat expectations, but the focus of the report was on the increase in hourly earnings.  The monthly increase of 0.4% doubled the expected 0.2% advance.  To date, the lack of wage gains had been a concern for the Fed as the labor market continued to tighten without signs of inflation. 

The only negative component of the report was a downward revision to June and July's payroll numbers.  A slower pace of job creation can be reasonably expected if employees are becoming more expensive.  On the flip side, gains in productivity can also be expected, as employers seek to boost output without hiring additional staff.

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