The Market Today

TODAY’S CALENDAR

Strong October Labor Report Affirms Fed Pause: October’s labor reports were notably strong, easing concerns of a sharp slowdown in the job market.  Total nonfarm payrolls rose 128k in October, better than the expected 85k gain.  More convincingly, the previous two months’ reports were revised up a combined 95k.  September payroll growth was revised up from 136k to 180k while August’s growth was revised up from 168k to 219k. For the year, payroll growth has now averaged 167k per month, down from 2018’s 223k-per-month pace.  While the narrative of slowing job growth remains correct, a mini-rebound in the second half of the year has made that slowing appear less dramatic.

By sector, private payrolls grew 131k which included a temporary 42k decline in the motor vehicle and parts sector.  That decline came from the UAW strike which has now been settled.  Those jobs should reappear in the November report, artificially inflating the headline tally in the same way that October’s figures artificially deflated the headline. The government sector lost 3k jobs which included a 20k loss in temporarily hired census workers. Excluding that reversal, the government sector actually added 17k jobs.

In the household report, the unemployment rate ticked up from 3.52% to 3.56% as 325k more people entered the labor force and 241k more people reported as employed.  The UAW strike should not have affected the household data as striking workers still qualify as employed. The labor force participation rate rose to 63.3%, the strongest rate since 2013.  The prime-age participation rate rose to 82.8%, its highest level of the cycle.

As for earnings, they rebounded less than expected in October, up just 0.21% after September’s 0.04% increase.  Earnings were expected to increase 0.3%.  The increase was, however, sufficient to lift the year-over-year rate back to 3.0%.  After some stronger reports this summer, earnings have lost momentum in the past two months.

Bottom Line: The October jobs report was quite strong with better-than-expected payroll growth, very strong revisions to previous reports, even more tightening in the household report despite the uptick in the unemployment rate, and still-tepid earnings growth.  This is unlikely to change Fed policy and reinforces officials’ belief that the economy is stable enough to end its mid-cycle adjustment.

ISM Manufacturing Index, Construction Spending, and Plenty of Fedspeak: At 9:00 a.m. CT, the ISM Manufacturing Index and September Construction Spending data will be released. Dallas Fed Bank President Kaplan is scheduled to speak at 8:30 a.m., followed by Vice Chairs Clarida and Quarles, San Francisco’s Daly, and New York’s Williams later this afternoon.

YESTERDAY’S TRADING ACTIVITY

Stocks and Yields Declined on Trade Worries and Weak U.S. Survey: Stocks opened notably weaker and Treasury yields pushed lower after Bloomberg reported that China doubted a long-term trade deal was possible and a regional U.S. manufacturing survey slumped sharply and unexpectedly. The Bloomberg report indicated “Chinese officials have warned they won’t budge on the thorniest issues” and some have “relayed low expectations that future negotiations could result in anything meaningful” unless the U.S. rolls back some tariffs. Minutes after the open, the MNI Chicago PMI tumbled sharply and unexpectedly to its second weakest reading since the recession. While some analysts pointed out that Boeing’s woes and the GM strike could have affected the results, it followed overnight data from China that was also weaker than expected and had reignited worries about the global economy. Those worries were a major culprit behind the Fed’s decision to cut rates on Wednesday, a move that started the recent yield decline over the last 24 hours.

Stocks Post Monthly Gain Despite Thursday Drop and Treasury Curve Ended October Steeper: The S&P 500 slipped 0.3% on Thursday as the 2-year yield fell 7.6 bps to 1.52% and the 10-year yield dropped 8.6 bps to 1.69%. Over the last two days, the 2-year yield has declined 12.2 bps and the 10-year yield has fallen 15.1 bps. For the month of October, the S&P 500 rose 2.0% and the Treasury curve pivoted between the 7-year and 10-year yields in steepening fashion. The 2-year yield fell 9.8 bps while the 10-year yield inched 2.6 bps higher.

OVERNIGHT TRADING ACTIVITY

Market Optimism Returns Before a Heavy Slate of U.S. Economic Data: A sense of optimism returned to global markets Friday following a sell-off yesterday that was sparked by trade worries and weaker economic data. On the trade front, China’s foreign ministry said Friday that the U.S. and China remained in close contact, while U.S. Commerce Secretary Ross noted that the phase one deal is in “good shape” and another phone call between the two sides is scheduled for later today. On Thursday, China’s official government manufacturing PMI, which tracks activity at larger companies, was reported down more than expected in October. Ahead of this morning’s jobs report and subsequent ISM update on U.S. manufacturing, however, a separate survey showed smaller and medium-sized producers fared better. The Caixin manufacturing PMI improved unexpectedly and matched its best level since 2016, with the new orders component creeping up to its best level since 2013.

Treasury Yields Reverse Higher After Strong Jobs Report:

Chinese shares led a generally-stronger day across the region, with the CSI 300 pushing up 1.7% in its best day since August 19. That helped lift the Stoxx 600 0.4% just before 7 a.m. CT and lead U.S. equity futures to a modest recovery in front of this morning’s payroll report. As equities improved, sovereign yields inched higher across Europe while the Treasury curve fluctuated close to Thursday’s final levels. Just before the report, contracts on the S&P 500 were up 0.2% and the 2-year and 10-year yields had drifted down 1.4 bps and 2.3 bps, respectively. After the surprisingly strong jobs report, stocks held their gains and yields reversed sharply higher. The 2-year yield moved to up 4.2 bps on the day while the 10-year yield jumped to 2.6 bps above Thursday’s close.