The Market Today

Drop in Unemployment but Weak Wage Growth Unlikely To Close the Divide at the Fed

by Craig Dismuke, Dudley Carter


Slowing Payroll Growth, Tightening Labor Market, and Surprisingly Soft Earnings: Nonfarm payrolls rose 136k in September as 22k more government sector and 114k more private sector workers were added.  August’s disappointing totals were revised higher with total payroll growth up 38k to 168k and private sector payrolls up 26k to 122k.  The pace of jobs growth is certainly slowing.  The 3-month average for private payroll growth has slowed to 119k, its weakest pace since 2012.  The 3-month average for total payroll growth has been buoyed by July and August’s temporary boost in government census worker hirings. Government payrolls grew 44k in July and 46k in August (12-month average for government payroll growth is only +12k). September’s tally showed 22k new government sector jobs and included only 1k in census workers.  As such, it appears the census hirings have likely already occurred and the pace of growth will revert to the norm in coming months.

In the household report, the unemployment rate fell from 3.69% to 3.52%, a new low dating back to 1969. The underemployment rate fell 0.3% to 6.9%, a new low back to 2000. The report showed another 117k persons entered the labor force and 391k newly employed persons. The number of unemployed dropped 275k. After the fifth consecutive month of increased participation, the participation rate held at 63.2% while the prime-age participation rate held at its cycle-high of 82.6%.

The earnings data were quite disappointing with average hourly earnings flat in September and average weekly hours worked unchanged at 34.4.  Every sector showed weaker earnings than their 12-month trend with the exceptions of other services and leisure.  The weak tally brought the year-over-year rate down from 3.2% to 2.9%, the first month below 3.0% since last July.  There was some speculation that the UAW strike might negatively affect the earnings data in the motor vehicle and parts sector, but this was not the case.  Workers in that sector saw earnings rise 1.0% for the month.

Bottom line: Payroll growth is slowing as evidenced by the weakest 3-month average for private sector payroll growth since 2012.  The household report shows continued tightening of the labor market evidenced by the lowest underemployment rate since 2000.  Earnings growth is stubbornly inconsistent and not showing signs of rapid acceleration despite the ever-tightening labor market.  This is likely to give ammunition to both sides of a divided Fed, with some citing the tighter labor market as reason to wait on any additional cuts and others citing the soft earnings data.     



Markets Wait After Weak ISM Data Raises The Stakes For September’s Payroll Report: Global markets haven’t moved much Friday as investors anxiously awaited this morning’s U.S. jobs report. Stocks were generally flat across both Asia and Europe after U.S. equities fully recovered from a sharp, post-ISM sell-off on Thursday (more below). Foreign yield curves were little changed following yesterday’s big drop in Treasury yields. This morning’s official labor data from the BLS could make or break the week for investor sentiment dented by ISM data showing the largest contraction of manufacturing activity since 2009 and one of the weakest rates of expansion of the cycle for the services economy (more below).

Market Expectations Have Moved Notably This Week To Expecting A Near-Term Cut: Those signs that the U.S. economy could be slowing more steeply than expected have pushed yields notably lower this week and lifted the likelihood the Fed could cut rates. The 2-year yield has fallen 24 bps as the chances of a Fed rate cut later this month has surged to above 80%. The 10-year yield has fallen 15 bps since last Friday. Immediately ahead of the jobs release, both were essentially unchanged on the day while futures on the S&P 500 had weakened by 0.3%. Following the mixed bag of labor data, which included a notable drop in unemployment, the 2-year yield rose to up 2.6 bps on the day while the 10-year yield moved to up 1.0 bps. Stock futures turned positive with the S&P contracts 0.2% higher.


Treasury Yields Fall for Sixth Consecutive Day: Yesterday’s ISM non-manufacturing report disappointment (more below) sparked a sharp drop for Treasury yields as well as stocks. The S&P 500 fell 1.2% immediately after the release as it appeared that bad news was bad news for stocks once again.  The 10-year Treasury yield dropped 6.8 bps to 1.507% while the 2-year yield fell 8.6 bps to 1.366%. The odds of an October rate cut (25 bps) jumped another 16% according to Fed Funds Futures contracts.  Driven by two disappointing ISM reports, the likelihood of a rate cut has now increased from 39% to 87% this week alone.  As expectations for a rate cut grew, stocks quickly reversed with the S&P recovering all of its intra-day losses, eventually closing up 0.8%.  The 2-year Treasury closed the day at 1.386%, the 10-year closed at 1.532%, and the spread between the 2s10s widened 2 more bps to +14.


Big Miss In Services PMI Amped Up Worries Of U.S. Slowdown: Compounding worries created by Tuesday’s contractionary manufacturing PMI, the ISM’s Non-manufacturing index was much weaker than expected. The headline PMI dropped 3.8 points in September to 52.6, well below the 55.0 economists had estimated, to its weakest level since 2016. September’s reading was just a couple of tenths above its second worst level since the Great Recession. The details were notably weaker as activity (55.2) and new orders (53.7) both tumbled more than 6 points. New orders hit the weakest level since 2016 and second weakest since 2014. Employment was also disappointing, down 2.7 points to a near-contractionary 50.4, the weakest level since 2014. Compared with last September’s 60.8, which represented this cycle-high for the index, services activity has slowed notably. September’s report will fuel worries that uncertainty and global weakness is filtering out of manufacturing and into the economy more broadly.

Kaplan Prefers to Act Sooner than Later: Dallas Fed Bank President Kaplan appeared open to an October rate cut in comments yesterday.  Kaplan, who will be a voting member next year, said, “I would rather use adjusting the fed funds rate if we need to when it matters, which I think is doing it sooner rather than later.” He also warned about going too far, noting that “there are certain actions that maybe are an example of central banks maybe feeling too much pressure on themselves to handle a situation that maybe requires broad economic policy.”  He attributed the inverted yield curve mostly to fears of slowing growth, an indication that Kaplan’s stance on policy is likely highly informed by market developments.

Mester Warns That Easy Monetary Policy May Result in More Automation: Cleveland Fed Bank President Mester warned yesterday that monetary policy may not be the right tool for achieving the historical balance between low employment and firmer consumer inflation.  She noted that businesses are now “basically saying that it’s not really worth trying to hire of the pool that’s still out there because when they do bring them in, they don’t stay on staff more than a month…the response now is they’re going to start automating more.”  She went on to say, “I am very sympathetic to getting to maximum employment, that’s certainly our goal. I think the policy tool we have in monetary policy isn’t really going to affect the overall labor market in the way you want to.”

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