Was the September payroll report “too hot” or “too cold” for the markets’ liking? There was something for everyone in this morning’s report, but we think it wise for investors to look past the downbeat headline job loss.
While nonfarm payrolls declined last month by a net 33K jobs, far worse than the consensus expected, investors will find solace in a whole host of other labor market indicators that reveal an underlying labor market that continues to show evidence of resilience and continued tightening.
The unemployment rate dropped two-tenths of a percentage point to 4.2% in September as the labor force participation rate improved to 63.1% from 62.9% in August. Household employment surged by 906K jobs last month, according to the BLS report. Moreover, wage growth appears to have accelerated. Average hourly earnings increased 0.5% in September, pushing the year-on-year gain to a solid 2.9% from 2.5% in August. Even average weekly hours managed to hold steady at 34.4 hours despite hurricane disruptions.
The nonfarm payroll drop last month was largely due to a big decline in food service and drinking places and below-trend job growth in other industries. Manufacturing, retail trade, information, and leisure and hospitality sectors all saw net job losses last month. Given the extent of the damage in Florida and Texas from hurricanes Irma and Harvey this will not be a huge surprise for the markets.
So despite the outright drop in jobs in September and a net downward revision in nonfarm jobs over the last two months of 38K jobs, we are willing to look past the headline numbers and focus on the underlying evidence of continued labor market tightening and recovery. The FOMC should key in on the lower unemployment rate, rising average hourly earnings, and labor force participation as the signals on whether to raise interest rates again in December. I expect Federal Reserve officials to maintain their hawkish bent. It helps that other economic indicators from manufacturing and non-manufacturing PMIs, factory orders, and vehicle sales already point toward economic rebound in the fourth quarter.
Treasury yields are higher across the board today. The futures market probability of another Fed funds rate hike by December 2017 is at 80.2% on the underlying firmness in the labor market, jumping from yesterday when the probability was 73.3%. The probability of a December rate hike in the Fed funds futures market has been steadily rising all week.
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