(Friday Market Open) Blame it on the storms.
For the first time in seven years, monthly job growth declined in September, falling 33,000 in the wake of hurricanes hitting the South. A sharp drop of more than 100,000 positions in food service and drinking places took the biggest toll. Stocks stumbled in pre-market trading after the disappointing data hit the wire.
Though Wall Street analysts generally expected a weak report due to the hurricanes, this was a much poorer result than almost anyone had imagined. The average analyst estimate was for jobs growth of around 75,000, down from a revised 169,000 in August. The Department of Labor, which said in its report that the storms hurt September’s job picture, also significantly lowered its estimate for July jobs growth to 138,000.
One interesting thing in the report was wage growth of 0.5%, well above Wall Street’s expectations. However, this also seemed to reflect the negative impact of the storms. A drop in low-wage positions in the food and drinking places industry might have caused wages to momentarily rise due to those positions going away. Let’s check back next month when things settle down a bit to get a better sense of the wage picture.
In the wake of the jobs report, Dallas Fed President Robert Kaplan told CNBC that despite September’s weak employment data, the labor market is “tightening.” When the Fed talks about a “tightening” job market, it could mean Fed officials are concerned that businesses might have trouble locating new labor, meaning wages might have to rise to attract workers. Sometime that’s an inflation signal.
Looking at sectors other than the 105,000-position decline in food and drinking, the report showed health care as the biggest gainer, followed by employment in transportation and warehousing. There wasn’t much movement at all in some of the job areas where we like to see growth, including construction and manufacturing. Business services, another key area, rose a mild 13,000.
Overall unemployment fell to 4.2%, and the number of so-called “discouraged” workers also declined, potentially a positive signal. Still, there’s no way to really put lipstick on this report, as it’s the first time since September 2010 that monthly jobs have fallen. Keep in mind, though, that the report is just one month of data, and remember that the government upwardly revised August job growth. There’s always a chance September could get a revision, too.
Friday’s disappointing jobs number aside, the S&P 500 Index (SPX) finished Thursday on its longest winning streak since 2013, rising eight-straight sessions. If the SPX manages to post more gains today, it would be the first nine-session winning streak since late 2004. Additionally, the SPX has posted six-consecutive record-high closes, the longest stretch since 1997.
Yesterday’s solid gains came amid renewed hopes on Wall Street for a tax reform package as the House approved a budget. Some saw that as a step in the direction of tax reform. As far as tax reform, it’s still way too early to predict winners and losers. There’s a long way to go.
It’s actually a little unusual to see the market go straight up without a pullback. That's what some people on Wall Street are trying to come to grips with, because even the fiercest rallies normally encounter profit taking at some point. Investors would be prudent to remember to examine their allocations and make sure the stock portion hasn’t gone above percentages they feel comfortable holding.
On the other hand, data continue to reflect strength in the economy, and it might be hard for stocks to fight the positive numbers. Factory orders for August rose 1.2%, the government said Thursday. That was above Wall Street’s expectations for 1% growth. That followed better than expected construction spending and automobile sales earlier this week. Crude oil inventories sank more than expected, too, perhaps a sign of growing demand.
With jobs data in the rear-view mirror, today brings several Fed speakers as well as reports on wholesale trade and consumer credit.
Crude oil managed to claw back above $50 a barrel Thursday after dipping below that psychological level late Wednesday. That helped give the energy sector a boost, but the leading sectors Thursday were elsewhere. Info tech and financials — likely to be among the most closely watched as earnings season gets underway next week — led all sectors Thursday. Financials might have gotten a boost from higher bond yields as hopes for tax reform grew with the House budget passage. Ten-year yields are huddling near 2.36%, the highest level since mid-July.
Tilting at $50: Since an extended period above $50 a barrel that ended in early March, U.S. crude oil futures have climbed back above that level four times, but to date haven’t been able to hold it for more than a few weeks. One difference this time might be the fact that U.S. stockpiles are lower than they’ve been in a while, at 465 million barrels after last week’s surprisingly large draw of 6 million barrels. However, that’s still high for the time of year, and U.S. production remains near recent peaks above 9.5 million barrels a day. So production and stockpiles aren’t providing much in the way of a tailwind. Nevertheless, oil bounced off of $50 on Thursday and the question is whether it can stay there. As always, check today’s weekly U.S. rig count for any hints of how price action might be affecting U.S. production plans.
VIX Watch: Amid the focus on today’s jobs report, some people might have missed another benchmark as the VIX — an indicator of market volatility — fell Thursday to its lowest close ever at 9.19. That was a 4% drop from the previous day and below the previous low close of 9.31 set in December 1993.
Broken Windows: There’s a lot of talk about how the economy might see some benefits from the hurricanes, especially after September automobile sales rolled in better than expected. The thinking is that people might be replacing cars that were damaged or destroyed. That’s one theory, but the counter-argument could be the “broken window” school of economics, which posits that if someone has to pay for something that’s been broken, they might not buy something else they otherwise would have purchased. The net benefit in that scenario is neutral, not positive. It’s still too early to see how the hurricanes could ultimately affect the economy, so keep an eye on retail sales next Friday for possible clues into how consumers might be reacting. Earnings from home improvement retailers like Home Depot (HD) could also provide a window when they report.
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