The Market Today

Hurricanes Batter Jobs Data; FOMC Likely Emboldened by Pre-Existing Wage Strength

by Craig Dismuke, Dudley Carter

Hurricanes Batter Jobs Data; FOMC Likely Emboldened by Pre-Existing Wage Strength:  Nonfarm payrolls were hammered by the hurricanes in September with total nonfarm payrolls contracting 33k during the month.  Hurricane Irma hit Florida on September 10, during the reference period for the labor surveys.  Hurricane Harvey hit Texas on August 25, prior to the reference period, but its impact was longer-lasting and may have still had an effect on the data.  This marks the first monthly contraction for payrolls in seven years, since the immediate aftermath of the Great Recession.  Private payrolls contracted 40k while government added 7k jobs.  The hurricane impact was clear in the sector data with 111k payrolls lost in the leisure sector, including 105k in the food/beverage industry.  The state-level payroll data is scheduled to be released on October 20 at which time we will be able to further determine just how much of the weakness came from the storms.


In the household report, the Unemployment Rate fell from 4.44% to 4.22% as 575k more people reported as being in the labor force and 935k more people reported as being employed.  According to the BLS report, 1.47 million people could not work because of weather, the most since January 1996, versus the 10-year average for September of just 189k.  However, the BLS also said the weather showed no discernible effect on the unemployment rate.  While the unemployment report looks exceptionally strong, it is hard to square with the more modest trend in job growth seen in the payroll reports, even excluding the most recent weather-affected data.  Average weekly hours worked held steady at 34.4 while average hourly earnings jumped a surprising 0.5% MoM. The monthly jump was materially affected by a 1.3% MoM gain in wages for utility workers, compared to a trailing 6-month average gain of just 0.1% MoM.  As such, the September earnings data were also clearly impacted by the Hurricane.  The one concern for bondholders in the report, the July and August earnings data were both revised up from 2.5% YoY to 2.6% and 2.7% respectively.  Even before the storms battered the data, there appears to have been more wage pressure than initially reported.  This pre-existing strength in wage gains will embolden the Fed heading into December as they look through the current, weather-affected data.


Overnight Activity – Yields Rise Ahead of this Morning’s Payroll Report: Ahead of this morning’s U.S. payroll report, the global momentum in sovereign debt was for higher yields and the overnight equity performance varied in Asia and Europe. Before 7 a.m CT, Treasury yields had nearly matched yesterday’s increase. The 2-year yield was 1.3 bps higher at an even 1.50% as the 5-year yield rose 2.2 bps to 1.97% and the 10-year yield was up 2.2 bps to 2.37%. The upward pressure on Treasury yields was consistent with trends in Europe where the 10-year yields in France, Germany, Italy, and Spain were all higher by between 2.5 and 3.9 bps. Equities had strengthened in Asia but weakened in Europe leaving U.S. futures mixed but little changed. The Dollar was firmer in most currency pairs but unchanged against a broader basket because of stability it the heavily-weighted Euro. After this morning’s hurricane-affected payroll report, yields spiked with the Dollar and U.S. stock futures weakened. The 2-year yield was up 3.1 bps to 1.52% shortly after while the 5-year yield touched 2.00% for the first time since March. The 10-year yield climbed 4.3 bps to 2.39%. The implied probability in fed funds futures of a December rate hike rose to 80%. The initial reaction was most likely driven by the spike in earnings and drop in the unemployment rate. However, because of all of the uncertainty surrounding this report, there are questions as to if the initial market reaction will be sustained.


Yesterday’s Trading Activity – Stocks Rally and the Dollar Rises with Treasury Yields on Solid Economic Data, a Step Forward on Tax Reform, and Hawkish Fedspeak: Stocks rallied sharply Thursday as the S&P and Nasdaq rose for an eighth consecutive session and the Dow gained in a seventh straight day of trading. The three major indices have now reached a record close every day of October. A jump in tech shares boosted the Nasdaq to a Thursday-best 0.78% gain as the S&P rose 0.56% and the Dow trailed with an even half-percent gain. Early morning economic data on jobless claims, trade, and factory orders (more below) were all better than expected and Republicans took a step forward on tax reform by passing budget resolutions through the House and Senate Budget Committee. The combination of those forces fueled equities’ strength. Financial companies gained on comments from three separate Fedspeakers that provided a positive outlook for the economy and continued to push for additional gradual rate hikes (more below). Treasury yields climbed early on those remarks and the future fed funds rate path implied in futures contracts edged higher. The 2-year yield closed up 1.6 bps to 1.49%, an almost nine-year high (October 31, 2008). The 5-year yield climbed 2.8 bps to 1.94%, near its highest level since March. The 10-year yield closed up 2.5 bps at 2.35%. The sell-off in yield sent the spread between 2s and 10s to its highest level (86 bps) since August 24. The Dollar joined in the on the rally, climbing 0.48% to its strongest level since July 25.


Factory Orders Top Estimates as Transport Orders Bounce, Good Capital Goods Data Becomes Better in Revision: August Factory Goods Orders were better than expected after a 5.1% increase in transport orders pushed headline orders up 1.2% from July. Excluding an 0.8% contribution from the transportation category, factory orders rose 0.4%. Both the durable and nondurable goods categories improved and only the fabricated metal and furniture products saw MoM declines. Revisions to the capital goods data signaled business activity in August was even stronger than the already-solid preliminary results from last week. Core capital goods orders, an indicator of future activity, were revised from +0.9% to +1.1% while shipments of the same, an indicator of activity in August, were revised from +0.7% to +1.1%. Momentum in business spending on equipment remains solid for 3Q.


Harker Holds to Hawkish Outlook through 2018: Philadelphia Fed President Harker said the U.S. economy is incredibly resilient and noted he expects growth for the full year “slightly above 2[%].” He said it will be up to elected officials in Washington to push through fiscal reforms if the growth rate is to improve much above the 2% trend seen since the recovery. The tax proposal could cause him to raise his forecast for growth, but in its current form, there are too few details to make an accurate assessment he said. On policy, Harker held to his hawkish lean towards additional rate hikes. He noted, “I have penciled in a third rate hike in December but we have to see how the inflation dynamics play out.” On 2018, he added, “I still have three rate hikes in for next year. …But again, we’ll have to see how the dynamics play out.”


Williams See More Rate Hikes as Temporary Inflation Weakness Fades: San Francisco Fed President Williams offered a less-than-stellar long-run outlook to a conference of community bankers. Using examples of pop-culture items that had seen their better days Williams advised, “Like the pager, the Walkman, and the Macarena, we’re unlikely to see such [above 4%] rates return. Bottom line: In the new world of moderate economic growth, banks need to plan for lower rates.” He added that such an environment “will have a significant bearing on lending growth and profitability.” Williams remained hawkish on his current policy outlook saying, “Favorable employment numbers, combined with the findings on inflation and the steady pace of growth, are all behind my confidence that rates will need to rise to their new normal levels.” Williams’ estimate of the longer run rate is 2.5%. The “findings on inflation” he referenced came from research his bank performed that indicated the recent weakness was centered in industries where previous “sharp price movements…have proven to have a temporary effect.” Williams added that he didn’t need to see actual inflation data move up to support additional gradual rate increases.


George Says More Hikes Needed: Kansas City Fed President George said that “moving interest rates at a gradual pace toward a level consistent with longer-run growth is the best step to help promote a continuation of the economic expansion. …Further gradual rate adjustments will be needed.” She cited the recent above-trend economic growth and below-forecasted unemployment rate as reasons to continue on with policy tightening. Waiting to do so “risks more aggressive moves, which, history shows can invite prospects of recession” and “risks similar distortions in capital allocation toward less fruitful, or perhaps excessively risky, endeavors that could result in financial imbalances.”

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