For most of this year, the market was focused on inflation numbers, as inflation was all that mattered for the Federal Reserve (Fed) expectations. And inflation fainted thanks to a significant downside correction in energy prices compared to last year and due to waning supply chain disruptions, which resulted in higher supply. But now, it becomes increasingly clear that we come toward the end of what we could get from post-Covid normalization and… energy prices. Therefore, the US jobs market must do the rest of the heavy lifting if the Fed wants to see inflation return and steady around its 2% monetary policy target. That makes the US employment and unemployment numbers critical for investors, again.
Today’s data could be one of the most important jobs data of the year because the US bond and equity markets are at a crossroads. The US 2-year yield refuses to lose the 5% mark from sight, while the US 10 and 30-year claim a further rise to 5% on expectations that inflation will remain higher for longer and that would require interest rates to stay higher for longer.
The S&P500 on the other hand is waiting in ambush, a few points above the critical 200-DMA (4205). Below, at 4180, the major 38.2% Fibonacci retracement is waiting to judge whether the S&P500 should remain in the positive trend, or sink its teeth into a medium-term bearish consolidation zone. The S&P500 kicked off the year at around 3850, and gains for the good part of the S&P493 have already vanished. Today’s jobs data could help investors find the next direction for the S&P500. Or not.
The US economy is expected to have added 170K new nonfarm jobs in September. That makes sense as last month’s figure stood at 187K and we expect the numbers to gently come down. Last year’s average remains at a strong 270K, but the last 6-month average is down to 235K additions in average per month and the last 3-month average is slightly below 200K job additions. The wages growth on the other hand is seen steady at around 4%, meaningfully above the actual CPI number (3.7%). T
Today, a reasonable wages growth data combined with another NFP number below 200K, preferably near the expectation of 170K, or ideally lower, should pour some cold water on bond yields, especially on the longer portion of the yield curve. But the impact of a cool down in US sovereign markets doesn’t mean that the stocks are out of the woods. For stocks to continue to perform well, the earnings expectation should keep up with the yields, and if the economy is slowing – a signal that we could get from eventually softer jobs data – investors may remain reluctant to return to stock markets.
In the series of Keeping Up with the Fed Members, Richmon Fed President Barkin said that there is a lot of fiscal issuance that’s creating a lot of supply, combined with the strong data and the Fed’s QT, the increased treasury issuance sure contributes to pushing yields higher. SF Fed President Mary Daily said yesterday that the Fed could refrain from raising rates again as the latest meltdown in the bonds market has had about the same effect than on more rate hike. Going into the data, activity in Fed funds futures gives around 78% chance for another pause in November, it appears that traders are betting historic sums on the outcome of the November meeting. That outcome depends on jobs and inflation numbers. So, I stop here, and let the numbers talk.
In energy, the oil selloff extended to a second day, prices fell in five over the past six trading days. The barrel of US crude hit the $82.5pb level yesterday. The selloff could extend toward $80pb level no matter what, if the market focus remains on ‘growth’ and ‘demand’. In case of a soft set of US jobs data, economic slowdown fears would boost the oil bears. In case of strong jobs data, the hawkish Fed expectations would fan recession worries and push oil to $80pb. I however don’t see the barrel of crude sink below the $80pb without OPEC intervening, at least verbally.
