Unemployment Rate Dips as Job Growth Stays Solid. What Now for Stocks, Dollar?

SEPTEMBER JOBS REPORT KEY POINTS:

• The September jobs report showed that the U.S. economy added 263,000 workers last month versus expectations of a gain of 250,000 payrolls. Meanwhile, the unemployment rate fell to 3.5%, two-tenths of a percent below forecasts
• Average hourly earnings rose 0.3% on a monthly basis and 5.0% compared to a year ago, matching estimates
• The resilient labor market is likely to keep the Fed on a hawkish path

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Updated at 9:00 am ET

MARKET REACTION TO NFP REPORT

Immediately following the release of the September jobs report, the U.S. dollar, as measured by the DXY index, spiked higher, bolstered by a solid jump in U.S. Treasury yields. Meanwhile, S&P 500 and Nasdaq 100 futures plunged into negative territory, falling more than 1.5% at the time of writing.

Strong labor market data is likely to keep the Fed on the hawkish path, prompting policymakers to deliver additional interest rate hikes and preventing them from pivoting prematurely toward a dovish posture. This scenario should favor the U.S. dollar, but could create strong headwinds for equities.

Source: TradingView

Original post at 8:40 am ET

U.S. employers continued to hire at a healthy pace at the end of the third quarter for an economy traversing a rocky and uphill path amid stubbornly high inflation, slower growth and rising borrowing costs, a sign that the Federal Reserve’s front-loaded hiking cycle has not yet translated into much weaker demand for workers.

According to the U.S. Department of Labor, the country added 263,000 payrolls in September, versus 250,000 anticipated, following an unrevised increase of 315,000 in August. Meanwhile, the unemployment rate fell to 3.5%, matching one of its best levels in decades.

Today’s results confirm that the labor market remains resilient and extremely tight, even after two consecutive quarters of negative gross domestic product readings and one of the most aggressive monetary policy tightening cycles since the 1980s. The report also challenges the recession narrative, defying claims of widespread hiring freezes and major layoffs around the country.

NFP RESULTS AT A GLANCE

Source: DailyFX Economic Calendar

Elsewhere in the NFP survey, average hourly earnings, a powerful inflation indicator closely tracked by the central bank, rose 0.3% on a seasonally adjusted basis and 5.0% in the last 12 months, meeting expectations in a poll conducted by Bloomberg News

Steady earnings growth, while positive for most Americans who have seen their real income tumble this year, will complicate policymakers’ fight to restore price stability, as elevated wage pressures could reinforce inflationary forces in the economy at a time when headline CPI is already running at its fastest pace in more than four decades.

SEPTEMBER JOBS REPORT

Source: TradingEconomics

IMPLICATION FOR THE US DOLLAR AND THE STOCK MARKET

Labor market tightness, coupled with steady wage pressures, will likely keep the Fed on the hawkish path, leading policymakers to maintain a restrictive stance for longer than initially expected and reducing the likelihood of a dovish pivot in 2023. In this environment, U.S. Treasury rates will stay supported, especially those in the front end, paving the way for the U.S. dollar to retain an upward bias, especially against its low-yielding counterparts.

Focusing on equities, today’s data still does not point to an imminent hard landing, but investors are forward-looking and understand that the Fed may have to slam on the brakes even harder to push the unemployment rate higher in order to cause the kind of demand destruction needed to knock inflation down and force it back to the 2.0% target. Volatility could erupt without warning in this environment, depressing risk appetite and preventing stocks from staging a meaningful and durable recovery. For the S&P 500 and Nasdaq 100, all this means that new cycle lows could be just around the corner.

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—Written by Diego Colman, Market Strategist for DailyFX