Fall Break for Fed? Bullish Jobs Report Shows More Signs of Slowing Economy, Easing Rate Hike Pressure

(Friday market open) U.S. jobs growth stayed on simmer in August as nonfarm payrolls grew 187,000, the U.S. Department of Labor reported Friday. The unemployment rate jumped and the government downwardly revised job gains from earlier this summer.

Though the jobs number came in slightly higher than the 170,000 analysts had expected, it doesn’t seem likely to raise inflation concerns or put the Federal Reserve on speed dial for additional rate hikes. Major U.S. stock indices rose and Treasury yields fell after the data came out. Chances of a September rate increase fell to just 7%, according to CME futures trading, and chances of a November quarter-point hike also fell sharply immediately after the data.

Looking deeper into the data, the unemployment rate climbed to 3.8% in August from 3.5% in July, while July jobs growth got trimmed to 157,000 from the previous 187,000. June growth dropped to 105,000 from 180,000, meaning jobs growth in June and July was 110,000 less than previously reported.

This downward revision—an unprecedented seventh straight month in which that occurred—could be evidence of what the Fed has long been waiting for: An extended period of softer jobs growth that suggests rate hikes may be slowing the previously sizzling labor market.

Wages rose by 0.2% in August, below the 0.3% average Wall Street estimate, and were up 4.3% year-over-year, a slight drop from 4.4% in July.

Ahead of the jobs report, markets had a relatively quiet night. News was a bit scarce, highlighted by weak manufacturing data from Europe and Australia. China’s Caixin Manufacturing Index, however, surprised with a reading of 51.0, compared with the consensus of 49.3. Anything of 50 or above signifies expansion. China’s government also made some additional minor policy adjustments designed to spur investment and spending.

Keep in mind that Monday is the U.S. Labor Day holiday and markets will be closed. However, today features a regular stock-trading session—no early close. Even so, many participants may get an early start on their weekend, meaning volume could thin as the afternoon proceeds. This can sometimes cause sharper moves in the market, so tread carefully.

Morning rush

• The 10-year Treasury note yield (TNX) slipped nearly 2 basis points to 4.07% after the jobs report.
• The U.S. Dollar Index ($DXY) inched lower to 103.38.
• Cboe Volatility Index® (VIX) futures eased to 13.29, a one-month low.
• WTI Crude Oil (/CL) futures climbed to $84.33 per barrel, near the 2023 high posted in August.

Just in

Jobs growth eased this summer and now has been below 200,000 for three months in a row, something we haven’t seen since 2020. The fierce pace of post-pandemic job additions had sent unemployment to 50-year lows but also raised concerns about stronger wages that could fuel inflation.

Today’s report is the second indication this week of a slower jobs market. July job openings, released Tuesday, fell to their lowest level in nearly 2 ½ years.

Though slower jobs and wages growth might hog the market’s attention, don’t discount the importance of labor participation, which also rose. It reached 62.8% after being stuck for months at 62.6%. This increase was the “brightest spot” in the report, according to Kevin Gordon of the Schwab Center for Financial Research. It’s a potentially Fed-pleasing data point that could point to easing pressure on wages as more people enter the work force and companies don’t have to compete as heavily for employees.

From a sector perspective, health care added the most jobs in August at 71,000, the Labor Department said. Employment in leisure and hospitality trended up at 40,000 jobs added. The economy also saw moderate jobs growth in the construction and social assistance sectors. Professional and business services and financial jobs growth changed little.

Transportation and warehousing jobs fell by 34,000, possibly due to the bankruptcy last month of Yellow Corp. Information employment also fell.

Glancing at where the job gains and losses played out in August, it looks like the lighter wage gains might reflect slower jobs growth in higher-paying industries like finance and professional and business services.

What to watch

Not done with data: Shortly after the open we’ll get the August U.S. Institute for Supply Management (ISM) Manufacturing PMI, and analysts expect it to remain in contraction at 47, according to consensus from Trading Economics. That would be up from 46.4 in July, but anything below 50 signals contraction. The U.S. factory economy has suffered nine straight months under 50, with demand remaining weak in July, according to ISM.

Dry spell: If this week was an oasis of economic data, beware of desert sands ahead. Investors will have to scrape the bottom of the barrel for interesting numbers in the coming days. Factory Orders on Tuesday looks like the most prominent U.S. data due, while the Fed’s Wednesday Beige Book release might also be worth a look. The Beige Book is an anecdotal read on economic activity across all 12 Fed districts that policymakers use as a tool to prepare for their upcoming policy meeting/decision.  

While lack of data might mean less volatility on Wall Street, the combined dearth of both data and major earnings in the week ahead—along with many people taking a long holiday—could limit trading volume. When volume falls, market moves can be more dramatic, so anyone considering trading next week should keep that in mind and perhaps consider either waiting or making smaller trades than usual.

A sparsity of data and earnings sometimes means investors look up from their monitors to focus on geopolitical events. That could make the market more vulnerable to outside influences in a week that traditionally features light volume. This sounds like a potential recipe to end the long pullback in volatility we just experienced.

Eye on the Fed

As of this morning, the probability that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will maintain current rates after its September 19–20 meeting was 93%, according to the CME FedWatch Tool. Expectations that rates will rise at the FOMC meeting in November fell sharply to 35% this morning, from 44% a week ago.

Talking technicals: The 50-day moving average for the 10-year Treasury yield has been in an uptrend since May. It now coincides with the important psychological level of 4%, just below the market’s current level near 4.09%. The 10-year yield bounced off the 50-day MA on July 19 and hasn’t traded below it since mid-May.

Stocks in spotlight

Broadcom (AVGO), a chip market and artificial intelligence (AI) competitor of mega-cap Nvidia (NVDA), had big shoes to fill when it reported earnings on Thursday a week after Nvidia shared results. Investors apparently didn’t love what they saw, sending shares down sharply in premarket trading after Broadcom slightly surpassed analysts’ average estimate. Guidance for the company’s fiscal Q4 met Wall Street’s expectations.

One lesson from the recently finished earnings season is that simply beating estimates didn’t often spark a rally in shares. Broadcom is the latest victim. Investors apparently hold companies to tough standards, especially considering the low bar analysts generally set for company results. It’s something to remember starting in six weeks when Q3 earnings season begins.

China impact considered: It’s common knowledge that China’s post-Covid recovery hasn’t lived up to expectations for a variety of reasons. The question is how this disappointing run for the world’s second-largest economy could affect economic growth and markets globally. Is it a contagion, or contained?  Schwab’s chief global investment strategist Jeffrey Kleintop explores the potential ramifications in his latest post.

Thinking cap

Ideas to mull as you trade or invest

A month to forget: August featured a roughly 1.7% decline in the broader market, with just one S&P sector—energy—forging monthly gains. Utilities brought up the rear, dropping nearly 7% during the month, while other laggards included consumer staples, real estate, and materials. Notice a pattern? Some of the sectors considered “bond proxies,” such as utilities and staples, struggled in August as bond yields climbed. Higher yields challenge companies that rely on dividends to attract investors, and those companies have, for the most part, been adding to their payouts. About 98% of U.S. companies either raised their payouts or held them steady during Q2, Barron’s reported. Health care and real estate firms led the dividend charge.

Keep on truckin’: The August 6 bankruptcy of transport firm Yellow Corp. and the loss of its 30,000 jobs likely played a major role in raising job cuts above 75,000 in August from below 25,000 in July. Perhaps August’s 267% rise in monthly job cuts was a one-time occurrence that won’t be repeated in September. The job cuts data came out the same day the government reported another slide in goods prices in July, stretching the trend toward spending on services over goods. The pandemic pulled forward spending on many of the goods handled by trucking and warehousing firms, likely easing demand for these items over the last year. Despite the sluggish goods demand, trucking firms enjoy solid gains year-to-date on Wall Street.

Yield sign: Treasury yields called the shots for stocks most of August, and that’s unlikely to change in the new month. It’s no coincidence that Wall Street’s recent revival from the August 18 S&P 500® Index (SPX) low below 4,400 coincided with a 10-year yield that’s dropped more than 25 basis points from the recent 15-year high. The yield retreat reflected a slew of soft recent data, including job openings and quits, ADP jobs growth, Consumer Confidence and the government’s downward revision to Q2 Gross Domestic Product (GDP).

Calendar

Sept. 4: U.S. markets are closed for Labor Day.

Sept. 5: July Factory Orders and expected earnings from GitLab Inc. (GTLB) and Zscaler Inc. (ZS).

Sept. 6: MBA Mortgage Applications Index, Trade Balance for July, Institute for Supply Management Non-Manufacturing Index for August, Fed’s Beige Book.

Sept. 7: Nonfarm Productivity and Unit Labor Costs for Q2.

Sept. 8: July Consumer Credit and expected earnings from Kroger (KR).