After Thursday’s rout, the market enters Friday focused squarely on the September payrolls data. A headline number of 134,000 doesn’t really seem exciting, but there was a lot of positive news deeper down.
September jobs growth of 134,000 was well below expectations
Hourly pay rose 2.8% year over year, in line with expectations and possibly easing inflation fears
Big upward revisions to previous job reports could indicate continued economic strength
(Friday Market Open) The old adage about not judging a book by its cover probably applies to Friday’s September payrolls report. Though the headline jobs growth number slid dramatically, there may be enough creamy filling inside to paint a relatively positive picture about the economy.
Most importantly, the report might push back some of the inflation fears that plagued Wall Street on Thursday. While payrolls rose a relatively muted 134,000 during the month, wages climbed only 2.8% year over year. That was down from 2.9% in August and basically in line with analysts’ expectations. Going into the report, there was a lot of concern that if wages rose faster than in August, the market might interpret that as a sign of the economy getting too hot. Judging from Friday’s data, it doesn’t look like there’s any need to turn up the air conditioning.
Looking deeper into the data, the government upwardly revised job growth for both July and August, meaning that combined growth in those two months is now 87,000 above the previous mark. In August, a massive 270,000 jobs were created, while July was subdued at 165,000 but up nearly 20,000 from the previous report.
One thought being bandied around in the minutes after Friday’s report is the possibility that Hurricane Florence, which ripped through North Carolina last month, might have weighed on job growth in the region and had a negative impact on the overall number. We saw something similar with hurricanes at this time last year. It’s going to be important to check numbers in future reports to see if this one gets revised or perhaps if job growth revives in a big way as the hurricane after-effects work their way through the southeastern states. Last year, that seemed to be the case, with job growth recovering in the final months of the year.
Another positive trend is the broad gains in sector employment, particularly in construction and manufacturing. The economy gained 23,000 construction jobs and 18,000 manufacturing jobs, maybe a sign that businesses continue to expand their operations. The biggest gainer in September was so-called “professional and business services” employment, which grew by 54,000 and could be another indication of a thriving employment picture despite the relatively weak overall headline number in the report. Transportation and warehousing, along with health care, also posted solid September gains.
One number that just won’t budge is labor force participation of 62.7%. That was unchanged from the previous month. Some economists would like to see that figure begin to climb, a possible signal that the growing economy is attracting more people to jobs. Unemployment fell to 3.7%, the lowest since the late 1960s, but low labor force participation might play into that to some degree. That said, the number of unemployed people fell 270,000 in September. That big number might partly reflect lack of data due to the hurricane, because the number of unemployed is down just 0.5% year over year.
Looking back at Thursday, stocks did stage a late-day recovery from their lows. Both the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) ended down less than 1%, arguably a moral victory considering the thrashing they took earlier on.
It could be technically significant that the SPX managed to close above the psychological 2900 level. It also might be notable that gold barely managed gains despite inflation talk. When investor sentiment gets really fearful about inflation, gold tends to see more buying interest than it did Thursday.
Ironically, the weakness Thursday in both stocks and bonds could have its roots in some optimistic pronouncements earlier this week from Fed Chair Jerome Powell. He painted a picture of economic strength and continued expansion, and that appeared to trigger fears about the Fed eventually getting more heavy handed.
Think of all the factors that came together this week besides Powell, including Amazon (AMZN) announcing a $15 an hour minimum wage, data that mostly continues to impress, and the lead-up to today’s payrolls report. All this could help explain why investors got spooked about inflation and a hawkish Fed again. The futures market now projects 86% chances of a December rate hike and nearly 60% chances of another to follow in March, up from 50% last week.
On the bond side of the equation, a lot of factors were gathering strength all year, but didn’t really manifest themselves all at once until Thursday. Some of these factors include tightening labor markets, stimulative fiscal policy, robust gross domestic product (GDP) growth, and rates that remain pretty accommodative despite recent hikes. Put all those together and it’s really not too surprising to see 10-year yields advance to seven-year highs. You could argue that it was kind of late coming, actually.
With both stocks and bonds getting sacked way behind the line of scrimmage Thursday, one question is where the money might be going. There could be a move to cash by some investors seeking potential protection, and there’s also a chance of other “defensive” investments getting some interest. For instance, the Japanese yen rose vs. the dollar Thursday. Sometimes you might see money go into emerging or international markets when the U.S. market has a hiccup like this, but high oil prices, Italian political shakiness, and the climbing dollar might argue against this scenario for now.
As investors sold off bonds and stocks, the extended summer calm in volatility vaporized in the chill autumn breeze. The VIX spiked more than 30% at one point Thursday to 15, its highest point in three weeks (see Fig. 1 below). Still, VIX ended Thursday below its highs for the day, and volatility remains relatively muted, considering that VIX rose to nearly 18 in late June and spent much of Q1 above 20. The question is whether this current bout of inflation and rate worries could continue pressuring stocks, in which case VIX might stay elevated a while. Time will tell.
VIX isn’t the only elevated indicator. Check the recent dollar action. This week the dollar index carved through what looks like key technical resistance near the mid-95 handle and briefly topped 96. For most of the year, that area above 95.50 has proven a tough one, but worries about the Fed perhaps getting more hawkish and shaky emerging markets are among factors helping support the dollar now. Sometimes a climbing dollar can be bearish for stocks, as it tends to raise the price of U.S. products overseas.
Every sector fell yesterday with the exceptions of financials and utilities. Many sectors have been running quite hot lately and Q3 was a really positive one for the major indices, so it might not be too surprising to see a little break like this.
Can Unemployment Fall Further? According to Fed Chair Powell, some economists think there’s still enough slack in the labor market to allow the Fed to remove accommodation even more slowly. The argument these economists make, he said in remarks earlier this week, is that the so-called “natural” unemployment rate is below the current already historic low level. In what sounded like potential confirmation that the Fed finds itself stuck in the middle, Powell said the Fed’s current strategy of gradually increasing rates tries to take both the Phillips Curve (a theory that low unemployment can stir inflation) and what he called “the revenge of the Phillips Curve” in mind, not tightening too much to slow the recovery but not being so accommodative that inflation begins to be a risk. This helps provide a clearer view of the tightrope the Fed is walking.
That said, Powell saying later in the week that the Fed is “a long way from neutral at this point, probably,” might mean he still sees rates needing to go higher to reach a so-called “neutral” level that neither accommodates nor discourages growth too much. Where that level might be is still a guessing game.
Volatility and the Long-Term Investor: If you’re a long-term investor, you might wonder why to care about volatility. Perhaps it’s not an issue if you’re committed to keeping positions unchanged for months or years ahead. However, if you’re thinking about making any moves at all in the near future, it’s potentially a warning sign to proceed cautiously. A high VIX means the market expects lots of action—either up or down—and that it might not be the best time to jump in with both feet. If you’re considering a move—whether it’s to get into stocks or bonds at the new lower prices—it might be a good idea to do so a little at a time, though that would potentially raise your trading costs.
Hopping Along: Even before today’s payrolls report, data issued so far this week continued to point toward a roaring economy. That could be one reason behind the steep climb in Treasury note yields over the last few days. For instance, factory orders for August rose 2.3%, well above average analyst estimates of 1.8%, according to Briefing.com. Much of the jump was in orders for transportation equipment while other areas rose just a bit, however, so the report should be taken with a grain of salt. Before that, the ISM non-manufacturing index hit an all-time high, and the ISM manufacturing index fell, but remained near historic highs. Only auto sales and mortgage applications disappointed on the data front. Next week’s calendar brings closely watched inflation data.
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