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Analytics, 08 October 2022

September’s US job’s report

Friday was yet another terrible day for US stocks as investors were grace with a better-than-expected jobs report, indicating the labor market remains robust along with sustained stress on the Fed to stay hawkish on hiking interest rates. This led to a decline in all the three major US indices as US treasury yields rose.

Despite job growth coming in short of the Dow Jones estimate of 275,000 in September, with the nonfarm payrolls increasing 263,000 instead, the unemployment rate was lower at 3.5% versus the forecast of 3.7%. This indicates that wages are rising as the wide U.S. labor gap reflects higher demand for workers than workers available, thereby fueling inflation and the need for the fed to keep increasing interest rates.

Analysts on Wall Street adjusted their expectations on the Fed raising interest rates by at least 75 basis points, implying a 90% chance the policy rate will be increased to a 3.75% to 4% range at its November meeting, up from the 85% before the data.

Here is what you need to know about the job’s report and how the market reacted.

Brief on the Job’s report

In the month of september, Job growth fell just short of expectations, but still robust despite the Fed’s efforts to slow the economy and control inflation over the past few months this year. Nonfarm payrolls increased 263,000 for the month, compared with the Dow Jones estimate of 275,000. This was the first deceleration since April 2021, as August payroll figures came in at 315,000 increase.

The employment rate was also lower than expected at 3.5% versus the forecast of 3.7%s the labor force participation rate edged lower to 62.3% and the size of the labor force decreased by 57,000. However, Fed officials continue to indicate that they expect the unemployment rate to rise to 4.4% in 2023 and hold around that level before dropping down to 4% over the long run.

The fed continues to struggle in raising the unemployment and effectively reducing inflation, as companies face a massive mismatch between supply and demand that has left about 1.7 job openings for every available worker. That in turn has helped drive up wages, though the increase in average hourly earnings has fallen well short of the inflation rate, which most recently was at 8.3%.

Sectors that led the gains in non farm payrolls included leisure and hospitality, with an increase of 83,000 jobs, and healthcare which added 22,000 jobs. Construction was up 19,000 and wholesale trade climbed 11,000.

Market reaction

All three major indices took a beating on the wake of the Job’s report. The S&P 500 sank 2.1%, while the Dow Jones Industrial Average shed 450 points, or 1.5%. The Nasdaq Composite led the way down, plummeting nearly 3%.

Treasury yields on the other hand surged higher , with the benchmark 10-year Treasury adding 3 basis points to settle at 3.861%. It has seen a volatile couple of weeks, falling below 3.6% briefly earlier in the week after surpassing the 4% mark last week.

The yield on the policy-sensitive 2-year Treasury rose 5 basis points to 4.299%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as a reliable indicator of a recession when inverted, was at a negative 41.6 basis points, up from the negative 57.85 hit on September 22.

Expected Fed action following the report

Analysts on Wall Street adjusted their expectations on the Fed raising interest rates by at least 75 basis points, implying a 90% chance the policy rate will be increased to a 3.75% to 4% range at its November meeting, up from the 85% before the data.

Federal Open Market Committee members in September indicated they expect the Fed to continue the pace of its rate hikes with another 0.75 percentage point increase in November.

Traders assigned an 82% chance of a three-quarter point move following the jobs numbers, and expect another half-point increase in December that would take the federal funds rate to a range of 4.25%-4.5%.

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