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August Job Data Muddles Fed Rate Hike Chance: ETFs to Buy

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Pouring cold water on heightened possibilities of a September Fed rate hike, the U.S. job report for the month of August came in weather than expected. The August non-farm payroll reading of 151,000 was below the estimated 180,000 and the upwardly revised prior-month reading of 275,000.

Prior to this release, the ISM manufacturing number for the month of August suddenly came in weaker, shrinking for the first time since February, as new orders and output declined and factories shed jobs.

Needless to say, the weakness in the manufacturing sector mirrored on the labor market as employment in manufacturing, mining and construction fell. The decline could not be compensated by numerous service sectors that held steady on the job front.

The August job number was the lowest in four months. The unemployment rate and labor participation rate stayed the same at 4.90% and 62.80%, respectively. In August, average hourly earnings on private nonfarm payrolls grew 0.1% to $25.73, subsequent to a 0.3% rise in wage last month while the average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.3 hours, indicating a slowdown in growth.

September Rate Hike or Not?

With this, many market watchers have almost ruled out a rate hike at the FOMC meeting that is barely weeks away. Traders cut their bets on a rate hike to as low as 14%. Some analysts feel that the Fed will delay the rate hike to December at the earliest. Another analyst view is that the addition of 100,000 jobs a month is decent enough at the current phase of business cycle. Yet the uncertainty over the Fed’s hawkish stance cannot be ignored given the sudden slowdown in job growth.

However, there are assuring views as well. While some believe that this muted job data could be the result of a calendar effect and things might turn around going forward. Goldman Sachs still sees “a 55% probability of a rate hike this month, and Janus Capital’s Bill Gross also said the Fed is likely to move in September.”

Last Friday afternoon, Federal Reserve Bank of Richmond President Jeffrey Lacker said that payrolls are increasing at “double the rate needed to keep pace with growth in the working-age population.”

Market Reaction

The bond market gives the clearer indication with the U.S. 10-year Treasury yield rising 3 bps to 1.60% on September 2 from the previous day, while yield on the six-month U.S. Treasury yield falling 2 bps to 0.45% from the prior day. This steepening of the yield curve indicates that investors have faith in the economic growth but ruled out chances of a sooner-than-expected Fed rate hike.

Equity investors seconded this thought with all key indices remaining in the green. Top U.S. equities ETFs SPDR S&P 500 ETF SPY, Dow Jones Industrial Average ETF DIA added more-or-less 0.4% each on September 2 and PowerShares QQQ Trust QQQ advanced over 0.3%. A few more days of cheap dollar inflows gave the much-needed strength to equity bulls.

ETFs to Play  

In such a scenario, investors can bet on the below mentioned ETFs. Though September is normally the worst month for an equity investor, if we go by seasonality, this time it may turn out a little positive.

Vanguard S&P Mid-Cap 400 ETF IVOO

Mid-caps generally offer the best of both worlds – large and small. In a slowly growing U.S. economy, mid-cap stocks should come across as the best bets. It is moderately exposed to international economies and consequent currency fluctuations. Plus, a value quotient in it would be an added advantage to weather difficult times. IVOO was up over 1% on September 2.

WisdomTree SmallCap Dividend ETF DES

Investors should note that though the U.S. economy grew 1.1% in Q2, economists expect 2.7% expansion in Q3, as per Bloomberg. So, if you are too bullish an investor and have high hopes on the ability of the U.S. economy to deliver strong growth ahead, you can also play small-cap ETFs. But a focus on dividend would make your bet more intriguing. DES was up about 1% on September 2 and it yields 2.89% annually (read: Why Small-Cap Value ETFs Are Winning Picks Now).

PowerShares KBW Regional Banking Portfolio ETF KBWR

If the curve continues to steepen, this regional bank ETF would benefit considerably. Smaller banks should do well in a growing economy, albeit slowly. Plus, these banks borrow money at short-term rates and lend capital back at longer-term rates. Due to this spread, regional bank ETF like KBWR is a wining proposition in a steepening of the yield curve. KBWR also added 1% on September 2.

PowerShares FTSE RAFI Emerging Markets Portfolio ETF PXH

As bets over a hawkish Fed began to ebb following subdued job data, emerging market ETFs surged. The fund added over 1.9% on September 2 and it yields about 2.55%. Indications of further inflows of cheap dollar and hunt for yield will likely keep this segment steady in the coming days (read: 5 Reasons Why Emerging Market ETFs Are Still a Buy).

iShares Gold Trust ETF (IAU - Free Report)

Gold regained its lost ground on weak job data. The prospect of a rising U.S. dollar for the coming days has waned now. This has given a boost to commodity ETFs like gold bullion. IAU was up over 1% on September 2 and will likely remain on an uptrend in the days to come (read: Fed or Trump: Who Will Decide the Fate of Gold ETFs?).

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