September’s Jobs Report Comes in Stronger Than Expected

The September nonfarm payrolls report from the U.S. Labor Department showed that the economy added 263,000 jobs during the month, higher than the 255,000 expected by economists, while the unemployment rate unexpectedly declined to 3.5% from 3.7% in August. Furthermore, average hourly earnings rose by 0.3% from the previous month and 5% from the year ago period. This was a decline in wage gains from the 5.2% year-on-year rate in August.

Importantly, there are signs that the job market remains healthy and competitive. Furthermore, jobs gains were broad-based and across industries. The leisure and hospitality sector added the most jobs at 83,000, while health care and social assistance services added the second most jobs as positions increase by 75,400, food services and drinking places add 60,000, and professional and business services added 46,000 jobs during the month. The government sector continued to lag and was the only sector where job losses were seen.

The stock market retreated sharply, with the S&P 500 down 2% in the mid-morning session and bond yields rose moderately. The yield on the 10-year U.S. Treasury Note was up to 3.91%, rising 8.2 basis points from yesterday’s close. 10-year notes started the year trading at a yield of 1.51% and have now almost tripled in the first nine months of the year. The more rate sensitive 2-year yield of U.S. Treasury notes increased by a less robust 5 basis points, trading at close to 4.31%. Given that the yield on shorted dated paper is now higher than the yield on longer dated debt, the yield curve is “inverted” once again. An inverted yield curve is generally seen as a leading indicator of a recession.

One of the negatives of the robust jobs report may be that the Fed could be more inclined to continue with its pace of 75 basis points rate hike for the month of November. While the market was already pricing in a 75bps hike during the FOMC’s meeting on November 2^nd, the probability of a 75bps move in December too now seems considerably higher. Next week Thursday’s CPI report would a key indicator in gauging how much front-loading the Fed is likely to undertake to bring inflation under control.

Anecdotally, companies in some sectors have also highlighted that they will either slow or freeze hiring in the short-term, while a select few companies have started laying-off employees to get ahead of a possible recession. Companies in the technology and communications sectors, especially, are pausing hiring and pursuing layoffs, while some in the construction and financial services space have started rationalizing costs. Despite these concerns, the labor market remains healthy, and today’s report did not seem to raise alarms about an upcoming recession that would either be deep or prolonged.

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