The jump in interest rates has gotten everyone's attention. The surprise isn't that interest rates have gone up. The surprise is that they have gone up so quickly.
The rapid increase has contained some shock value, as market participants have grown anxious at the thought that interest rates could be moving noticeably higher yet amid a confluence of factors that include stronger growth, rising inflation, deficit funding, technical selling, shifts in monetary policy among the world's leading central banks, and the Federal Reserve's balance sheet normalization effort.
The pop in rates has cooled some of the stock market's bullish enthusiasm, as it has reined in many highly-valued growth stocks of late. At the same time, it has triggered concerns about the future pace of economic growth that are raising questions about the pace of future earnings growth.
The pullback in the grand scheme of things has still been relatively modest, but a stark reminder that the path of interest rates is going to influence the path of the stock market has been laid out this week for stock market participants.
The path of rates today is still higher and that has to do in part with the September employment report, which was better than the initial payrolls headlines first suggested.
September nonfarm and private sector payrolls were much weaker than expected. That will be attributed by some sources to the effects of Hurricane Florence, but the overriding point is that upward revisions to August nonfarm and private sector payrolls more than compensated for the headline misses for September.
In turn, average hourly earnings increased 0.3%, as expected. That mitigated the shock value that arose with last month's report when they were stronger than expected and may have mitigated (for now) fears about a rapid pickup for this metric, seeing that the year-over-year rate moderated to 2.8% from 2.9% in August.
The latter point notwithstanding, the key takeaway from the report is that the labor market is solid and still simmering with the prospect of pent-up wage pressures being unleashed at any point as employers encounter difficulty in finding qualified workers.
The notable headlines from the Employment Situation Report are as follows:
- September nonfarm payrolls increased by 134,000 (Briefing.com consensus 184,000). Over the past three months, job gains have averaged 190,000 per month
- August nonfarm payrolls revised to 270,000 from 201,000
- July nonfarm payrolls revised to 165,000 from 147,000
- September private sector payrolls increased by 121,000 (Briefing.com consensus 180,000)
- August private sector payrolls revised to 254,000 from 204,000
- July private sector payrolls revised to 137,000 from 153,000
- September unemployment rate was 3.7% (Briefing.com consensus 3.8%) versus 3.9% in August
- Persons unemployed for 27 weeks or more accounted for 22.9% of the unemployed versus 21.5% in August
- The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.5%, versus 7.4% in August
- September average hourly earnings were up 0.3% (Briefing.com consensus +0.3%), after increasing a downwardly revised 0.3% (from 0.4%) in August
- Over the last 12 months, average hourly earnings have risen 2.8%, versus 2.9% for the 12 months ending in August
- The average workweek in September was 34.5 hours (Briefing.com consensus 34.5) versus 34.5 hours in August
- September manufacturing workweek decreased 0.1 hours to 40.8 hours
- Factory overtime dipped 0.1 hours to 3.4 hours
- The labor force participation rate was 62.7% in September, unchanged from August
Separately, the Trade Balance Report for August showed a widening in the trade deficit to $53.2 billion from an upwardly revised $50.0 billion (from -$50.1 billion) in July.
That deficit stemmed from exports being $1.7 billion less than July exports and imports being $1.5 billion more than July imports.
The key takeaway from the report is that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit in a big way; moreover, with the third quarter real average trade deficit 8.9% higher than the second quarter average, trade will be accounted for as a negative input in Q3 GDP forecasts.
Market participants, meanwhile, are accounting for a lot of macro considerations this morning that is creating a mixed tone in the futures market. The S&P futures traded in a decent-sized range overnight, but are currently down one point and trading in-line with fair value. The Nasdaq 100 futures are down 12 points and the Dow Jones Industrial Average futures are down seven points.
There won't be much directional trading for the stock market at the open, yet that could change based on where interest rates go as the day unfolds. The 10-yr is up one basis point at 3.21%.