10/04/24: Strong September U.S. Labor Market Data

U.S. labor market data from September surprised to the upside, with strong job growth and a sharper-than-expected drop in unemployment, suggesting the economy may be more resilient than anticipated. Nonfarm payrolls surged by 254,000, well above the forecast of 150,000, while the unemployment rate fell to 4.1%, according to the Bureau of Labor Statistics (BLS). Despite these encouraging figures, some underlying concerns persist. Data from the Job Openings and Labor Turnover Survey (JOLTS) showed that August job openings rose to 8.04 million, driven by gains in construction and government jobs. However, the hiring rate fell to 3.3%, its lowest level since 2013 (excluding the pandemic), and the quits rate, which reflects voluntary job departures, dropped to 1.9%, signaling reduced worker confidence. Wage growth was revised higher both month-over-month and year-over-year for September, highlighting continued wage pressure. This combination of strong job gains, wage growth, and weakening hiring trends presents a complex outlook for the Federal Reserve as it considers its next policy moves.

Beyond the labor market, the divide between the manufacturing and services sectors highlights the economy's shift from goods to services. The Institute for Supply Management (ISM) reported that its Manufacturing Index remained below 50 for the sixth straight month, signaling ongoing contraction. In contrast, the services sector continued to show strength, with the ISM Services Index rising to 54.9 in September, its fastest expansion since February 2023. This growth was driven by strong consumer demand and rising new orders, though employment in the services sector grew at a slower pace. The stark contrast between the struggles of the manufacturing sector and the resilience of the services sector underscores divergent trends within the broader economy.

Amid rising geopolitical tensions and strong labor data, U.S. Treasury yields climbed this week. The 2-year yield increased by 34 basis points to 3.90%, while the 10-year yield rose by 21 basis points to 3.96%, narrowing the spread to +6 basis points as of this morning. Despite these movements, the front end of the yield curve remained inverted, with the 2-year/5-year spread at -10 basis points. Equity markets edged slightly lower for the week, with the S&P 500 slipping 0.50% to 5,709 as of this writing. Meanwhile, oil prices surged by $6.46 per barrel to $74.64 as tensions in the Middle East escalated. These market shifts reflect the delicate balance between geopolitical risks and economic data, leaving investors cautious as they navigate an uncertain landscape.

Looking ahead, market participants will focus on next week’s release of key inflation data, including the Consumer Price Index (CPI) and Producer Price Index (PPI). These indicators, combined with strong labor market data, will be crucial for the Federal Reserve as it works to balance monetary policy to address inflation control with labor market management. Based on current trends and our macroeconomic outlook, which anticipates positive but below-trend GDP growth, the Chandler team expects a 25 basis point cut to the federal funds rate at the Federal Open Market Committee’s November 7 meeting. We anticipate another 25 basis point cut at the December 18 meeting, bringing the federal funds rate to a range of 4.25% to 4.50% by year-end.

Next week: Consumer Credit, NFIB Small Business Optimism, Consumer Price Index,(CPI), Producer Price Index (PPI), University of Michigan Sentiment Index

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