Payroll Fridays will always be closely watched, but this one means less than most, at least in how it impacts Federal Reserve policy.

The Fed is almost certainly going to begin balance sheet normalization at their September meeting. Policymakers also want to hike again in December, and although that isn't a guarantee, we have lots of payroll reports (and other economic data) between now and then. Still, this report gives us a few things to consider. Here is my take.

Headline number surprisingly strong

We were expecting 180,000 in gains, so this should be considered a mild beat at +209,000. Still, with upward revisions to the last two months, it looks pretty good.

We have already seen a number of data points suggesting the economy has picked up speed heading into the third quarter. So, it is a nice piece of "hard data" verification of that trend.

Can this kind of strength keep up? Many don't think it can. If we are already at full employment, shouldn't payroll gains slow? Or at least, reach a limit?

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Obviously, unemployment can't fall forever, but historically we have seen payroll gains remain quite strong right up until we get close to a recession. So in a sense, a strong payroll report like this is a sigh of relief.

Of course, not everyone will view it that way ...

This is going to make the Fed nervous

As I said above, this one payroll number isn't terribly important to near-term Fed policy. But let's spin this forward, just for fun.

Strong payroll numbers will make those worried about Phillips Curve-style effects worry. The Phillips curve is the purported relationship between unemployment and inflation. It hasn't shown itself much this cycle.

Indeed, economists have found it hard to find this relationship in actual data any time in the last several decades. However, that doesn't really disprove the concept. It might just be that other effects have overwhelmed the Phillips effect, or that lag time has made it hard to prove, or even that good central banking has prevented its appearance.

This will make the Fed especially nervous since...

Wages show a nice rebound

The month over month Average Hourly Earnings was expected to rebound from +0.2% to +0.3%. Because of what was rolling off, expectations were for the year-over-year to drop slightly to +2.4%. We got the 0.3% increase and it was enough to actually push the YoY to 2.5%.

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I personally think this is more of a mild relief than something for the Fed to worry about. Maybe this is the beginning of runaway wage growth, but I seriously doubt it.

I will say that we have been hearing anecdotal evidence of tight labor markets from companies, especially at the lower-end of the wage scale. So, it could very well be that the classic relationship between unemployment and wages is there, we just can't see it because of compositional effects.

Still, this is nothing like the kind of wage growth that compels the Fed policymakers to tighten policy quicker than their current plan. Assuming this keeps up, it will just ensure the December hike actually happens. In other words, the Fed has been banking on this kind of wage rebound for a while.

Bonds sell off mildly

As I said above, at this point one report doesn't cinch anything for the Fed. So, despite the overall strong report, we are only getting a mild selloff. It isn't anywhere near enough to wipe out Thursday's strength.

Unfortunately, for trading we are stuck in a holding pattern waiting for more definitive news. I favor carry trades (credit, duration) for the rest of this month.

At the time of publication, Tom Graff had no positions in the stocks mentioned.