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The major indices have all taken a turn lower so far this week, succumbing to some selling interest that has been sparked by general profit-taking efforts after a big run in the third quarter and some nervousness related to a worsening geopolitical environment after Iran fired missiles at Israel, which prompted a vow of retaliation.
A rising Volatility Index and an increase in crude futures prices have been the signposts for the geopolitical concerns, but there has been more to the trading story.
In peculiar fashion, Treasury yields have not turned lower on safe-haven interest. They have turned higher this week, partly on some inflation angst related to the spike in oil prices and the start of a dockworkers strike at East Coast and Gulf Coast ports.
The good news is that the dockworkers strike has ended - for now anyway. The Longshoremen's Association and the United States Maritime Alliance reached a tentative agreement on wages (61.5% increase over six years) and will extend the existing master contract until January 15, 2025, as other outstanding issues (like port automation efforts) are negotiated.
This is good news for the economy, although not the best turn of wage pressure events for the Fed.
The better news for the economy is that hiring activity was much stronger than expected in September, the unemployment rate fell, and average hourly earnings increased more than expected. Specifically, nonfarm payrolls rose by 254,000, the unemployment rate fell to 4.1% from 4.2%, and average hourly earnings increased 0.4%, leaving them up 4.0% year-over-year.
The key takeaway from the report is that the labor market is in a solid position to keep the U.S. economy on a growth trajectory.
The thought that will be crossing the market's mind is that it is perhaps too solid to keep the Fed on an aggressive rate cut path, lest it risk re-igniting inflation. To be sure, that consideration will be on the Fed's mind.
There is now just a 10.2% probability of a 50-basis points rate cut at the November FOMC meeting, versus 53.3% a week ago, according to the CME FedWatch Tool. Meanwhile, the probability of a 50-basis points cut at the December FOMC meeting has been reduced to 24.1% today versus 56.4% yesterday.
The Treasury market is discounting this thinking. The 2-yr note yield is up 15 basis points to 3.86% and the 10-yr note yield is up nine basis points to 3.94%.
The equity futures market is liking the growth implications of the employment report, presumably because it believes even more now that the Fed's aggressive rate cut in September was a pro-active step to keep the economy growing, which is good for earnings prospects.
Currently, the S&P 500 futures are up 49 points and are trading 0.8% above fair value, the Nasdaq 100 futures are up 239 points and are trading 1.2% above fair value, and the Dow Jones Industrial Average futures are up 244 points and are trading 0.6% above fair value.
The question is, will inflation worries and rising bond yields rein in the stock market's enthusiasm for today's employment report?
Notable headlines from the September Employment Situation Report:
- September nonfarm payrolls increased by 254,000 (Briefing.com consensus 165,000). The 3-month average for total nonfarm payrolls increased to 186,000 from 140,000. August nonfarm payrolls revised to 159,000 from 142,000. July nonfarm payrolls revised to 144,000 from 89,000.
- September private sector payrolls increased by 223,000 (Briefing.com consensus 125,000). August private sector payrolls revised to 114,000 from 118,000. July private sector payrolls revised to 99,000 from 74,000.
- September unemployment rate was 4.1% (Briefing.com consensus 4.2%), versus 4.2% in August. Persons unemployed for 27 weeks or more accounted for 23.7% of the unemployed versus 21.3% in August. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.7% from 7.9%.
- September average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus an upwardly revised 0.5% increase (from 0.4%) in August. Over the last 12 months, average hourly earnings have risen 4.0%, versus 3.9% for the 12 months ending in August.
- The average workweek in September was 34.2 hours (Briefing.com consensus 34.3), versus 34.3 hours in August. Manufacturing workweek was unchanged at 40.0 hours. Factory overtime decreased 0.1 hour to 2.9 hours.
- The labor force participation rate held steady at 62.7%.
- The employment-population ratio increased to 60.2% from 60.0%.
