Stocks Reverse, Disregarding Upbeat Payrolls: Oct. 6, 2023

An initial decline in equity markets reversed this morning as investors looked at the underlying data accompanying this morning’s double beat in nonfarm payrolls data. September’s 336,000 job gain was double the expected number and the biggest gain since January. The strong headline result is fueling fears of a higher and longer fed funds rate with the Federal Reserve having repeatedly said it’s on the lookout for a resurgence in inflation and that the labor market will have to soften to rein in price pressures. Employment strength wasn’t limited to the states, with Canada reporting a triple beat of expectations.

Businesses in September continued to fight the Fed by chasing returns and expanding. Indeed, they have cash and don’t need much financing on an aggregate basis. Additionally, many businesses issued long-term debt when interest rates were historically low, so they currently don’t face the burden of refinancing with more expensive terms. September’s job growth was broad based with a non-cyclical tilt. Even though the non-cyclical private education and government categories added 73,000 and 70,000 jobs, respectively, the leisure and hospitality category led with 96,000 new employees. All other sectors were much weaker, adding the following numbers of workers:

• Professional and business services, 21,000
• Retail trade, 19,700
• Manufacturing, 17,000
• Wholesale trade, 11,700
• Construction, 11,000

Transportation and warehousing, utilities, financial activities, and mining and logging all added below 10,000 while information was the only loser, shedding 5,000 jobs.

Wage Pressures Moderate

The non-cyclical tilt of the job gains wasn’t the only positive feature of the Jobs Report, with cooler wage pressures and an expanding labor force presenting good news for taming inflation. Average hourly earnings growth slowed to 0.2% month-over-month (m/m) and 4.2% year-over-year (y/y) from 0.2% m/m and 4.3% y/y during the previous period. In addition, they came in a tenth lighter than projections on both a m/m and y/y basis. The labor force notched its fourth consecutive monthly increase, as 90,000 folks entered the workforce, adding precious supply to the economy while giving employers increased personnel options and bargaining power in regards to compensation. The unemployment rate, labor force participation rate and average weekly work hours remained unchanged at 3.8%, 62.8% and 34.4.  

Markets Bounce Back

Markets are recovering from this morning’s swoon as investors choose to focus on the positive areas within the payroll report. Stocks are now in positive territory while bonds have pared losses but remain in the red. All major equity indices are higher, led by the Nasdaq Composite which is up 1% while the Russell 2000, S&P 500, and Dow Jones Industrial indices have climbed 0.9%, 0.7% and 0.7%. Most sectors are higher with technology and industrials leading with gains of 1.3% and 1.1%. The defensive consumer staples and utilities sectors are the only ones lower, losing 1.1% and 0.4%. Yields on the 2- and 10-year Treasury maturities are up 5 basis points (bps) each to 5.07% and 4.77%. The dollar has reversed its gains, with its index down 33 bps to 106. The greenback is lower against the pound sterling, franc, euro, and Canadian and Aussie dollars while it gains against the yen and yuan. WTI crude oil is up $0.28 to $82.80 per barrel but is on track for a weekly loss in response to rising U.S. inventories.

UAW President Could Provide Wage Pressure Insights

As investors sift through this morning’s data for signs of wage pressure and continued tightness in the labor market, unions are continuing to strike for higher compensation and better benefits. UAW President Shawn Fain’s live presentation at 2 p.m. today regarding the union’s strike against the Big Three automakers is likely to provide insight into how successful the organization may be with winning a 36% pay raise, improved benefits and a four-day work week for its members.

GM says the strike has cost the company $200 million in lost revenue and the company is seeking an additional $6 billion in credit in the event the labor walk out is prolonged. GM has provided six proposals to the UAW. GM and Ford Motor have laid off thousands of workers due to the union shutting down operations and suppliers to the auto companies have also laid off workers. Last week, the UAW held off on escalating its strike against Stellantis, citing progress being made in negotiations with the company. So far, it has 25,000 members out of its 150,000 members employed by the companies striking.

The Sorry State of Global Trade

While the labor market in North America is as tight as strings on a guitar, this year is expected to close out with global trade of goods growing at only 0.8%, according to estimates by the World Trade Organization, which predicted in April that trade would grow 1.7%. The war in Ukraine, real estate troubles in China, persistent inflation and higher interest rates are all likely to cause trade to fall short of the organization’s April forecast. While auto sales are surging, the global economic slowdown has caused trade to weaken among a growing number of countries and it has also caused slowing consumption of iron and steel, office and telecoms equipment, textiles and clothing. The WTO also said the growth of services is starting to moderate after travel rebounded strongly in 2022.

Reasons For Optimism

The strong headline number has stoked fears of a firm labor market and potential wage gains supporting inflation, thereby requiring the Fed to become more hawkish. According to market pricing, odds of an interest-rate hike by year’s end rose to 56% following the jobs report, from 48%, indicating that investors are focusing on the topline numbers. Yet, an expanding labor force, which is a reflection of more people needing jobs, could potentially continue to ease wage pressures with the 0.2% wage gains from the past two months fairly consistent with a 2% inflation rate.

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