Instant View: Sept payrolls beat gives Fed room to stay aggressive

People line up outside a newly reopened career center for in-person appointments in Louisville, Kentucky, U.S., April 15, 2021. REUTERS/Amira Karaoud

NEW YORK, Oct 7 (Reuters) - U.S. employers hired more workers than expected in September, while the unemployment rate dropped to 3.5% from 3.7% the previous month, pointing to a tight labor market which keeps the Federal Reserve on its aggressive monetary policy tightening campaign for a while.

Nonfarm payrolls increased by 263,000 jobs last month, the Labor Department said on Friday. August was unrevised to show 315,000 jobs added. Economists polled by Reuters had forecast 250,000 job gains. With the labor market still tight, wage gains remained solid. Average hourly earnings increased 0.3% after a similar rise in August. read more

MARKET REACTION:

STOCKS: S&P e-mini futures turned sharply lower, last down 1.3%

BONDS: The yield on 10-year Treasury note jumped was last up 7.8 basis points at 3.902%; The two-year U.S. Treasury yield, was up 7.7 basis points at 4.327%.

FOREX: The dollar index turned firmer and was last up 0.419% at 112.710.

COMMENTS:

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN“The labor market seems to be coasting along despite the Fed’s efforts to throw some speedbumps in the way. Those speedbumps will happen eventually. The Fed has its blinders on until they get to 4.5%, so the data won’t matter until then.”

RUSTY VANNEMAN, CHIEF INVESTMENT STRATEGIST, ORION ADVISOR SOLUTIONS“While payroll growth was slower than expected, this morning’s jobs report resulted in a minor reduction in the unemployment rate to 3.5%, we see this as a negative sign for the health of the US stock market.”“With the Federal Reserve working to tame historically high inflation, we were hoping to begin seeing a more drastic slowdown in the labor market as a positive sign that Fed tightening is producing its intended effect.”

OLU SONOLO, HEAD OF U.S. REGIONAL ECONOMICS, FITCH RATINGS

"The deceleration in job gains this month to 263K combined with the significant decline in job openings of 1 million from the latest JOLTS report, clearly signals a once red-hot labor market that is now cooling. The unemployment rate ticked down on the back of marginally lower participation rate from 62.4% to 62.3%. The Fed will interpret the weakening labor demand, marginal decline in supply, and moderating wage pressures -0.3% m/m in this report, as a mixed bag against the backdrop of their resolve to fight inflation."

TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST, INVERNESS COUNSEL, NEW YORK

“It’s really a middle of the road type report. I don’t think it was really that surprising, especially when you take into account the revision of the prior month in term of non-farm private payrolls, so that went higher, and this month went lower. To me they offset each other. The unemployment rate ticking down ticking down was interesting, it indicates the participation rate well. So, more people deciding to retire, just not work, is the conclusion of that. I don’t see anything here that would change the way the Fed would act. Rates ticked up somewhat on this. That’s simply a reflection of the market the Fed might not raise 75 basis points.

“What this report does is really cement another 75 basis point rate hike, which is really no surprise to anybody."

MATTHEW TUTTLE, CEO, TUTTLE CAPITAL MANAGEMENT, CONNECTICUT

"(The) Fed is consistently coming out and saying 'Not only do we not care about the market, we actually want to see the market go down.' The only thing that can change that narrative is some sort of pivot whether it's BoE type of action or just Fed coming out and saying 'now we're only doing 25 bps.' People were watching this report for some Armageddon in the jobs market where the Fed would be forced to say we don't see 75 bps hike but there's none of that. There's nothing to say we've got a problem in the jobs market and everything looks fairly close to expectation. If you're a bull, it's not such a good thing.

“Right now I'm taking the Fed at their word which is they are hawkish and they will stay hawkish and if the economy slows down, it slows down. The only thing I'm not taking their word for is that they can engineer a soft landing. Our thinking is that it gets ugly. The only reason they will get dovish is if they break something. The Fed will get dovish only if the economy is totally in the tanks. If you're a long only investor in the stock market right now, you've got a problem."

ADAM BUTTON, CHIEF CURRENCY ANALYST, FOREXLIVE, TORONTO

"The U.S. dollar is a crowded position, and any sign of U.S. economic weakness will weigh heavily on the dollar, but it certainly didn't come with nonfarm payrolls."

MATTHEW TUTTLE, CEO, TUTTLE CAPITAL MANAGEMENT, CONNECTICUT

"Fed is consistently coming out and saying 'Not only do we not care about the market, we actually want to see the market go down.' The only thing that can change that narrative is some sort of pivot whether it's BoE type of action or just Fed coming out and saying 'now we're only doing 25 bps.' People were watching this report for some Armageddon in the jobs market where the Fed would be forced to say we don't see 75 bps hike but there's none of that. There's nothing to say we've got a problem in the jobs market and everything looks fairly close to expectation. If you're a bull, it's not such a good thing.

“Right now I'm taking the Fed at their word which is they are hawkish and they will stay hawkish and if the economy slows down, it slows down. The only thing I'm not taking their word for is that they can engineer a soft landing. Our thinking is that it gets ugly. The only reason they will get dovish is if they break something. The Fed will get dovish only if the economy is totally in the tanks. If you're a long only investor in the stock market right now, you've got a problem."

PAUL CRAIG, PORTFOLIO MANAGER, QUILTER INVESTORS, LONDON (via email)

“With this jobs report it seems clear we are on course for another significant hike from the Fed, with the market pricing in a 75bps rise in interest rates at its next meeting. This report will simply solidify its hawkish rhetoric even if that translates into setting policy by looking in the rear-view mirror as it looks to tame the inflation beast that it has lost a handle on. Equities will naturally react negatively as a result, stoking the volatility we have seen of late as geopolitical issues once again come to the fore. With midterms around the corner and OPEC confirming it is to cut production, consumers will continue to feel the financial pain as they head to the polls."

JOSEPH LAVORGNA, CHIEF U.S. ECONOMIST, SMBC NIKKO SECURITIES, NEW YORK

“They’re going 75 (bps) because that unemployment rate is going to bother them. The job growth is slowing, but that doesn’t matter. In their mind we’re still at full employment if not through it.

“It’s kind of a boring report because there’s nothing in it that suggests the economy is rolling over. It’s not strong but it’s not rolling over because if it was you’d see the unemployment rate going up and you’d see job growth slowing sharply. It’s downshifting at a reasonably moderate pace. Wages numbers are certainly slowing, so that will fly a little in the face of the labor market being as tight as it might seem on the surface.

“Basically, if the Fed was thinking it might go 75 in November, they’re going to be forced to go 75 after this number. Unless the CPI next week was shockingly soft, which is unlikely given a variety of factors. We haven’t felt the full effects of the tightening.

“They’re going to keep going until eventually this thing turns over, and when it turns over you won’t be able to slow the momentum. But right now there’s not a lot of downward momentum in the labor market.”

SHAWN CRUZ, HEAD TRADING STRATEGIST, TD AMERITRADE, CHICAGO

“The market, what had really given us a little bit of a lift-off earlier in the week was kind of a ‘bad news is good news’ sort of mentality, and there really wasn’t any bad news in this report, it kind of came in as expected. If you look at what has been going on that has given markets a lift, it has always been some measure of growth coming in worse than expected or labor markets coming in a little bit soft versus when you see things come in really well, the day we had a decent bump lower was when the weekly jobless claims came in lower than expected. The market doesn’t want a healthy labor market right now, but this actually showed, pretty much across the board some job gains. If you look at construction, manufacturing, those areas kicked higher, it’s a pretty solid jobs report.

“It’s not what the market wants to see and for the Fed it is definitely not going to give the Fed any reason to think they need to pause or pivot or whatever anybody was looking for to make them shift away from their hawkish intentions.”

“It's pretty much what they have been telling us, if you are someone who is looking for a pause or pivot or whatever it is, they are pretty much flat-out telling you we are not doing that. People keep trying to convince themselves. It’s like are you lying to me or lying to yourself, it seems like a lot of people are lying to themselves that the Fed will stop.”

JASON PRIDE, CHIEF INVESTMENT OFFICER FOR PRIVATE WEALTH, GLENMEDE, PHILADELPHIA

“Our take on it for the Fed is that this sort of Labor report doesn't change their mind. There's a little bit of moderation in here, but not enough to take them off current path at this point in time.”

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS , PITTSBURGH

"The tepid jobs report wasn't sour enough to make investors think that the Fed will take their foot off the pedal of interest rate hikes. The market is saying is, yes, that the Fed still has cover to raise rates aggressively."

"Markets are worried that the Fed is going to rely on information like this that is really a month old and they're going to overshoot and kill the economy. And that is what is driving down the markets at this point, investors don't have confidence in a soft landing because the Fed continues to have to ramp higher and higher to begin to slow the economy down."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The topline was within consensus, but higher than I was looking for.”

“The good news is that (average hourly) earnings are not outpacing previous reading. This is a lukewarm report, and it shows that there is cooling in the labor market. Bottom line it’s moving towards the Fed’s wishes.”

“Futures are down, and the real winner is the dollar which is strengthening further.”

“I expected unemployment to kick higher but that didn’t happen. I’m blaming it on the falling participation rate.”

“The numbers are beginning to play into the hands of the Fed. But the Fed is likely to raise (interest) rates by in November.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON

"Nothing in the US jobs report to dissuade the Fed from continuing with its aggressive path of monetary tightening. Even though the number of jobs created was the softest figure since April last year, the drop in both the participation rate and the headline unemployment rate will not be comfortable reading for the Fed. The only piece of good news is that hourly earnings are not accelerating, although with the falling participation rate suggesting a shrinking labour force, if this continues then renewed upwards pressure on wages will be seen at some point."

"Overall, it is hard to see the report as anything other than supporting the Fed’s current hawkish stance and has probably cemented a 75bps rates rise at the next FOMC meeting."

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