Inclusive of today’s stronger than expected labor report, the market digested a significant amount of employment data this week. The U.S. economy added 336,000 jobs in September, significantly higher than market expectations of 170,000, and the July and August payroll reports were revised higher as well by 119,000. Consistent with recent reports, the largest gains came from the leisure and hospitality space which added 96,000 jobs to the total. As such, restaurant and bar employment are now back in-line with pre-pandemic levels. The unemployment rate was unchanged at 3.8%, and the labor participation rate was consistent with last months report at 62.8%. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons declined slightly to 7.0% from the prior month at 7.1%. One positive the Fed decision makers are likely to take away from today’s employment report is the wage component declined on a year-over-year basis. On a month-over-month basis, hourly earnings were unchanged from August at 0.2%, but year-over-year earnings declined slightly to 4.2% and were below expectations of 4.3%. Excluding the ADP report, the employment data released earlier in the week was consistent with Friday’s strong data. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) unexpectedly increased to 9.61 million in August from a revised 8.92 million in July. The level significantly surpassed the survey of Bloomberg economist expectations of 8.82 million and reflects approximately 1.5 job openings per available worker. Although JOLTS was an upside surprise, the measurement of voluntary job leavers known as the quits rate remained at a benign 2.3% for August, well below its 3.0% peak in April 2022. Fewer quits can imply that workers are less confident in their ability to find another job in the current market. The ADP report released on Wednesday contradicted the week’s stronger employment data with private employers adding only 89,000 jobs in September, well below Bloomberg Survey expectations of 150,000 and significantly below the upwardly revised total of 180,000 in August. Although this week’s employment data reflected the strength and resilience of the U.S. labor market, it’s important to note the data is backward looking. Moving forward, a slowdown in the pace of hiring and protracted labor strikes such as the UAW strike will add to the risk of higher unemployment.
The Institute for Supply Management (ISM) manufacturing index increased to 49.0 in September from 47.6 in August. In addition, the employment sub-index moved into expansionary territory for the first time since May, at 51.2 from the prior month read of 48.5. Nevertheless, the headline reading of 49.0 remained below 50.0 for the eleventh consecutive month indicative of contraction in the manufacturing sector. The Institute for Supply Management’s Services Index eased to 53.6 in September from the six-month high of 54.5 in August, in-line with analysts’ expectations of 53.5. The prices paid component continued to grow at 58.9 primarily due to high labor costs and an uptick in energy costs, but new orders reflected a significant slowdown of -5.7 to 51.8 from the prior release of 57.5.
Longer dated treasury yields surged this week with both the 10-year and 30-year US Treasuries climbing to levels not seen since 2007. While the 2-year treasury yield currently trading at 5.09% moved up 6 basis points this week, the yield on the 10-year is up 19 basis points to 4.78% as of Friday morning. The yield inversion between the 2-year and 10-year treasury which hit a cycle high of 108 basis points narrowed further this week, ending at approximately 31 basis points. As a result of the longer dated yields moving higher, Freddie Mac reported the average mortgage for the week of October 5th was up to 7.49%. Reflecting the challenge of higher mortgage rates on home buyers, the MBA mortgage applications index released this week was down 6% for the week of September 29th and down 18.5% from a year earlier, in addition, mortgage applications have dropped to the lowest level since 1996. Next week, market participants will have key inflation data to digest inclusive of both the Consumer Price Index (CPI) and Producer Price Index (PPI). Following the strong labor data released this week, the Fed as well as market participants will place an enhanced focus on the release of these two important reports on inflation. Although the strength of the US jobs report will be an important factor for the Federal Reserve to consider when determining the appropriate path forward for rates, the Chandler baseline has not changed as we expect the Fed to hold rates steady at their next meeting while keeping their optionality open based upon further trends in the data.
NFIB Small Business Optimism, Producer Price Index (PPI), FOMC Meeting Minutes, Consumer Price Index (CPI), Import Price Index, Export Price Index, University of Michigan Sentiment
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© 2023 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.