Job Bonanza: September Growth Almost Doubles Expectations, And Yields Spike, Stocks Slump In Aftermath

(Friday market open) U.S. jobs growth surged in September to 336,000, its highest level since January, signaling that the labor market remains hot and that the Federal Reserve may have to keep rates higher for longer to fend off any resurgence of inflation.

Major indexes immediately slumped in premarket trading after the U.S. government data hit, and the benchmark 10-year Treasury yield spiked 15 basis points to 4.86%, a new 16-year high. The dollar also climbed. Strength in yields and the dollar continue to weigh on Wall Street, and this Nonfarm Payrolls report isn’t likely to help. Analysts had expected jobs growth of 170,000 in September.

The government also raised its estimates for July and August jobs growth by 119,000 versus its prior reports. This is a change in trend from earlier this year when revisions were mostly downward.

It’s hard to find much in the report that would support stocks or tame yields, but it did show hourly earnings climbing just 0.2% versus expectations for 0.3%, a possible supportive factor. Unemployment remained unchanged at 3.8%.

“Average hourly earnings were quite tame,” says Kevin Gordon, senior investment strategist at Schwab.

Heading into today, the S&P 500® Index (SPX) is down almost 1% over the last week, with only two sectors—info tech and communication services—higher. Energy, which led Q3 sector performance, is the worst performer, followed by defensive sectors staples and utilities.

The SPX is on pace for a lower weekly finish. If it does fall from a week ago—when it settled at 4,288—it would be the fifth straight week of lower closes for the index. The last longer streak was a seven-week downturn in the spring of 2022.

Morning rush

• The 10-year Treasury note yield (TNX) leaped 15 basis points to 4.86%.
• The U.S. Dollar Index ($DXY) jumped to 106.74.
• Cboe Volatility Index® (VIX) futures edged up 19 46.
• WTI Crude Oil (/CL) was near steady at $82.40 per barrel.

Just in

Looking a bit deeper into the jobs report, the labor participation rate stayed unchanged at 62.8%, which remains the highest level since the pandemic. That’s a positive sign that more people have entered the labor force and are looking for work. When the employee base is higher, it can keep wage growth tempered, potentially helping company margins and suppressing inflation.

Information technology payrolls declined again, so some of the highest-paying jobs are rolling off the books.

Leisure and hospitality was the sector with the most added jobs in September at 96,000. That sector tends to pay lower, which might help explain why hourly earnings growth didn’t swell. Average hourly earnings rose 4.2% year-over-year versus Wall Street’s expectations for 4.3%.

Health care and government employment also rose sharply in September, but many industries on the goods side of the economy like oil and gas extraction, manufacturing, mining, and construction saw few new jobs created.

The average work week was unchanged in terms of hours in September, in line with analysts’ expectations.

What to watch

The Week ahead: Two key reports next week are Wednesday’s U.S. September Producer Price Index (PPI) and Thursday’s Consumer Price Index (CPI). The order is switched this time, as usually CPI comes out ahead of PPI.

The outcome of the inflation data, along with today’s jobs report, could help determine where Treasury yields go next week. As a reminder, the recent spike in benchmark 10-year Treasury note yields to 16-year highs reflects multiple factors: increased supply from the U.S. Treasury; recent hawkish Fed comments and projections; mounting worries that inflation and high interest rates could last well into 2024; and the Fed’s quantitative tightening (QT) policy.

Minutes from the last Federal Open Market Committee (FOMC) meeting are due out on Wednesday afternoon and could provide more insight into how FOMC members came up with projections that hurt stocks by removing two anticipated rate cuts from next year.

Speaking of the central bank, Fed Governor Christopher Waller is scheduled to speak at noon ET today. That might be the first chance we get to hear remarks on today’s jobs report from a Fed policymaker.

Stocks in spotlight

The Q3 earnings season begins next week, highlighted by a host of big bank earnings on Friday, October 13. Other expected earnings next week include PepsiCo PEP, Walgreens Boots Alliance WBA, Delta Airlines DAL, and Domino’s Pizza DPZ.

Stay tuned today for the latest update from research firm FactSet on analysts’ average estimates for Q3 S&P 500 earnings per share and revenue growth. Last week, FactSet said analysts expect a -0.1% decline in Q3 EPS, which would mark the fourth straight quarter of falling year-over-year earnings.

Returning to the present, keep an eye on automakers’ stocks today after a report from Reuters yesterday that the companies and the United Auto Workers (UAW) are making progress. And The Wall Street Journal reported this morning that Exxon Mobil XOM is closing in on a $60 billion deal to buy Pioneer Natural Resources PXD. A deal would give Exxon access to important oil drilling territory in the eastern part of the Permian Basin of West Texas and New Mexico. Shares of Pioneer climbed 9% on the news.

Eye on the Fed

Following today’s jobs report, the probability that the FOMC will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting rose slightly to 27%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 40%.

“The Fed may hike again this year, but it’s far from a guarantee,” Schwab Center for Financial Research analysts say in a report. On the question of rates, “higher-for-longer” may be more important than “how high?”

“Whether or not the Fed hikes rates again, we expect the Fed to hold rates at a high level until it’s convinced that inflation will get back to its 2% target,” the analysts add.

Talking technicals: The 200-day SPX moving average near 4,200 might represent technical support. Farther below the market is the 10% correction level of 4,130. Resistance above the market is near 4,292.

CHART OF THE DAY: TRADING PLACES. The S&P energy (IXE-candlesticks) and technology (IXT-purple line) sectors have been playing a game of musical chairs. Technology dominated back in July when this chart begins, but energy took the lead as Q3 progressed and mega-cap tech names got clobbered. Now energy is taking its lumps and tech is coming back. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Credit check: As big banks prepare to report, the corporate credit market shows signs of strain under the load of rising rates. “Risk assets appear to be adjusting to the threat of ‘higher for longer,’” notes Collin Martin, a director and fixed income strategist at the Schwab Center for Financial Research. ”High-yield bond spreads are up more than 50 basis points in less than two weeks, and average spreads are at their highest levels in more than 3 months.” When spreads widen between corporate bond yields and Treasury yields, it can reflect a tougher borrowing environment for businesses. In this case, it appears to be affecting those with lower credit ratings on the high-yield side of the market. Tightening credit might mean banks have grown more reluctant to lend to certain businesses, which could dry up venture capital, commercial real estate, and other businesses dependent on a relatively free flow of funds.

Fill ’er up: Gas may get cheaper, if the futures market is any indication. RBOB gasoline (/RB) at the Chicago Mercantile Exchange (CME) fell sharply Thursday and Friday to fresh 2023 lows below $2.20 a gallon after U.S. demand plunged last week to a nine-month trough near 8 million barrels a day, according to the U.S. Energy Information Administration (EIA). That’s an average weekly usage last regularly seen in the late ’90s, discounting the peak of the pandemic. Digging a bit deeper, U.S. gasoline use during the final week of September was the lowest for that week since 2000, according to EIA data, and late-September usage topped that level back in 1996 when the U.S. population was 20% lower. Four-week usage is the lowest for this time of year since 1998. Soft demand could reflect people driving less due to expensive gas, but it isn’t just about the economy. Electric cars and improved efficiency suppress fuel use, too. Also, the number of miles traveled each month by U.S. drivers has stalled near 3.2 billion, according to the St. Louis Fed—about the same as five years ago. Less driving and increasingly efficient cars could sound alarms for automakers, OPEC, and energy companies.

Powell posts: The Fed and its Chairman Jerome Powell aren’t typically thought of as particularly savvy when it comes to social media, though some Fed governors post online now and then. That reputation may change as the Fed announced it’s now on Instagram and Threads. The central bank will post information “and other resources” like speeches and press releases on the central bank’s social media page. Powell made the announcement in a “welcome video” where he looks more casual than usual, eschewing a tie. Still, the video generated titters from online audiences, judging from comments. This may be because the video had a certain “homemade” feel, and because Powell arguably looked less comfortable than he does, say, addressing congressional committees or a room of reporters. Will he achieve as much influence in social media as he has over the economy? 

Calendar

Oct. 9: No major earnings or data expected.

Oct. 10: August Wholesale Inventories and expected earnings from PepsiCo (PEP).

Oct. 11: September PPI and Core PPI.

Oct. 12: September CPI and Core CPI, and expected earnings from Delta (DAL), Domino’s (DPZ) and Walgreens Boots Alliance (WBA).

Oct. 13: Earnings expected from JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), United Health (UNH), and BlackRock (BLK), and University of Michigan Preliminary October Consumer Sentiment.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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TD Ameritrade® commentary for educational purposes only. Member SIPC.
 

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