Unbelievable Secrets and Surprises Revealed: Untold Stories Discovered Beneath the Surface of the US Jobs Report!

Friday’s stunning U.S. jobs report intensified debate over whether the Federal Reserve will raise interest rates again this year, with economists and analysts divided over the strength of the data and how much it will influence the direction of monetary policy.

Employers 336,000 new roles added in September, data from the Bureau of Labor Statistics showed. This is significantly higher than the upwardly revised figure of 227,000 for August, and well above consensus estimates of 170,000.

Behind that surprising number of headlines, however, lay more mixed and complex messages about what the report meant for the world economyinterest rates, bond and stock markets.

‘Strength without heat’

The big picture suggests that “the economy continues to grow and perform quite well, despite higher interest rates and tighter financial conditions,” said Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions, who saw this scenario increase the chances of The Fed once again raises borrowing costs in 2023.

Friday’s report also showed that the U.S. unemployment rate remained stable at 3.8%, while growth in average hourly wages — a number closely watched for signs of accelerating inflation — fell from 4.3% at 4.2% per year.

“Clearly wage growth is moderating – and that, to me, is the most important metric,” said Kristina Hooper, chief global markets strategist at Invesco.

Further complicating the narrative, the job gains announced Friday were driven narrowly by sectors that had lagged behind a broader labor market recovery after the initial Covid-19 crisis, such as education, healthcare , leisure and hospitality.

Strategists say the data suggests that despite some high-profile victories for US unions, many people who had held out for higher-wage jobs felt pressured to accept lower-wage positions amid tightening conditions. of credit.

The report “says something about American workers’ lack of bargaining power,” said David Kelly, JPMorgan’s chief global strategist, who noted that the mixed composition of Friday’s data indicated “strength without heat.”

The jobs data will only sharpen the scrutiny of next week’s inflation data, with economists expecting an annual consumer price index for September of 3.6% – down slightly from 3, 7% of August.

If solid job growth translates into increases inflationthe Fed may have to turn the political screw once again, analysts said, with knock-on implications for government bonds and financial markets generally.

The Fed’s next steps

Beyond inflation, there is perhaps no other data point that the Fed watches as closely as the monthly payroll report. What officials were looking for are signs of cooling demand in the labor market, which has shown surprising resilience despite a historically aggressive series of interest rate hikes.

Before September, the pace of monthly payroll growth had steadily slowed along with the number of job openings, even as the unemployment rate rebounded near its multi-decade low.

Wage growth also softened, providing relief to policymakers who feared a tight labor market was fueling inflationary pressures. Taken together, Fed officials said this amounts to clear signs that the slowdown they would have liked to see is occurring.

The latest report throws a small wrench into this narrative, but economists overall conclude that the labor market’s direction toward slower growth has not fundamentally changed.

Given that wage growth softened again in September and that some seasonal vagaries affected last month’s data, many still believe the Fed will hold off on the final quarter-point interest rate increase that officials had forecast on last month would have been necessary this year.

Futures markets on Friday were pricing in a roughly 40% chance of a further interest rate hike this year, up from about 30% a day earlier, according to CME’s FedWatch tool.

Much will depend on the October 12 CPI report. If that indicates a faster-than-expected pace of inflation, Nancy Vanden Houten, chief U.S. economist at Oxford Economics, believes it “could be enough to prompt the Fed to act” at its next meeting starting Oct. 31.

Repercussions on the bond market

The jobs report reignited the sell-off in government bonds that had taken hold after the Fed’s Sept. 20 policy meeting. At the time, officials held interest rates stable in a range of 5.25% to 5.5%, but their “dot plot” projections pointed to a further increase in 2023 and a slower pace of cuts in the next two years compared to what the markets had done. prices in.

Immediately after the report, long-term Treasury bond yields jumped to 16-year highs, while both the monetary policy-sensitive two-year yield and the benchmark 10-year yield soared as prices of debt instruments collapsed.

But those yields then slipped from the day’s highs, with some suggesting that investors returned to the numbers after a gut reaction and recognized the weaker-than-expected wage growth figure.

“After the dot plot, markets have been walking on eggshells,” said Invesco’s Hooper. “There’s this heightened sensitivity that he focuses on [rates staying] ‘higher for longer’ which simply expands into the general feeling that the Fed will be more aggressive than expected.”

That could ultimately trigger a self-fulfilling prophecy, analysts say, with markets working on the Fed’s behalf pushing up borrowing costs.

In the world of corporate debt, risky borrowers have already felt the pressure of rising rates and concerns about “higher for a longer period” financing costs, with the spread between yields on junk bonds and their debt equivalents Treasury which expanded by 4 percentage points at the end of September to 4.33%. points by the end of Friday.

But JPMorgan’s Kelly predicted that long-term interest rates would fall over the next year because “inflationary pressures do not appear extreme.” That should help stocks and bonds, she added, but “the big picture is that the economy will slow.”

In the markets, “the fever may rise a little more, but my guess is that this time next year we will be more worried about the chills than the fever.”

Equity investors find reasons for optimism

Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq Composite initially fell following the hot jobs data. But these declines soon reversed, with both stock indexes closing up more than 1% on the day.

“The reaction is quite surprising,” said Tim Murray, multi-asset strategist at T Rowe Price. “You would think that a very high number like we had would have scared investors even more about inflation, about the Fed.”

Technology, media and chip-making stocks including Facebook owner Meta and Disney were among the day’s biggest gainers. The rally helped U.S. stocks post a small weekly gain after closing the worst month of 2023 on concerns about “higher for longer” interest rates.

Dean Maki, chief economist at Point72 Asset Management, highlighted the “competing forces” within the jobs report.

“The strength of the report makes Fed tightening more likely, and has pushed Treasury yields higher,” he noted, “and those are negatives for stocks.”

But the numbers also highlight the economic resilience of the United States, he said, which could spark optimism about future corporate revenues and profit growth.