Let’s start by taking a look at the most important non-farm payroll data. This time, the data can be described as extremely exaggerated.
The data shows that there were 254,000 new positions added, while the expectation was 140,000, nearly double the expected amount. The data from the previous two months has also been revised upwards, with an increase of 17,000 in August, bringing the total to 159,000, and an increase of 55,000 in July, resulting in a total of 144,000. The most crucial unemployment rate also dropped by 0.1 percentage point again, to 4.1%, lower than the expected 4.2%.
Such data could potentially directly reverse the perception of the labor market. Does this still count as cooling down? After the update of this data, the three-month average surged significantly to 186,000, far exceeding the previous 116,000. Powell used this number as a reason to support a 50-basis-point rate cut at the September meeting. Obviously, the possibility of a significant rate cut in November will be greatly reduced. On CME, the market’s probability of a 25-basis-point rate cut in November has soared to over 97%, compared to just 68% yesterday, almost completely confirming the magnitude of the rate cut at the next meeting.
So let’s take a look at which positions have driven this recent increase. Is the increase broad or localized? The positions that saw the largest increase this time were in leisure and hospitality, with a significant rise of 78,000 positions, followed by healthcare and social assistance, which increased by 72,000. Government positions increased by 31,000, ranking third. On the other hand, the sectors that saw the most significant decrease were transportation and warehousing, with a reduction of 8,600 positions, and manufacturing, which decreased by 7,000 positions. The Chief Economist at LPL Financial indicated that this job growth is relatively broad, raising the possibility that the economy in the fourth quarter will outperform expectations. The only thing to watch out for is the increase in the proportion of people holding multiple jobs, which has risen to 5.3%.
In this report, there is one shocking point, which is the situation revealed by the household survey. The Non-Farm Payrolls report consists of two surveys, one is the establishment survey and the other is the household survey. The new job positions come from the establishment survey, while the unemployment rate comes from the household survey. However, during this period, there has been a significant discrepancy between the establishment survey and the household survey. The new job positions reported in the establishment survey have always been higher than those in the household survey, mainly due to individuals holding multiple jobs. In the establishment survey, one person may be counted in several positions, leading to criticism that the numbers are inflated. This was later confirmed when the new job positions reported in the establishment survey for the past year were revised down by 810,000.
However, in today’s report, it is surprising that the household survey shows stronger employment growth than the establishment survey, with an increase of 430,000 new jobs. Among them, full-time positions increased by 414,000, while part-time positions decreased by 95,000. How is this possible?
A senior economist at Group Economics explained that the sample sizes of the two surveys are different, with the establishment survey covering 650,000 businesses and the household survey covering 60,000 households. The establishment survey estimates the overall situation in the U.S. based on the impact of new and closing businesses, while the household survey is influenced by population and immigration. This time, it can be said that the impact of immigration was underestimated before, which is why the household survey shows such a significant increase in employment.
The strong growth in employment has also driven wage increases. In September, wages rose by 0.4% month-on-month, higher than the expected 0.3%, with an annual increase of 4%, surpassing the expected 3.8%. However, the average weekly working hours decreased by 0.1 hour to 34.2. Typically, average working hours are a leading indicator of the labor market, indicating that businesses may not be seeing high demand, thus reducing employees’ working hours, making it difficult for wages to continue to rise. One possible explanation is an increase in productivity. Nevertheless, the unexpected wage increase further indicates a strong labor market, reducing the urgency for the Fed to cut interest rates. The focus for the future is whether this exaggerated data will be revised downward, potentially altering our assessment of the labor market.
So, how will such hot employment data impact the market? Overall, it will only change market expectations for rate cuts, which is good news for corporate profits. Powell has also made it clear that the labor market is not the main driver of inflationary pressures at the moment. As long as this overall assessment remains unchanged, the hot job market will not cause the same fears of rate hikes as before, but rather be a sign of a strong economy. Next, we need to see officials’ evaluations of this data and whether there are any new changes in their discourse. This is the most noteworthy impact of this latest nonfarm payroll report.
Since officials’ evaluations are so important, let’s take a look at today’s remarks from Chicago Fed President Goolsbee. He indicated that you can no longer ask for better employment data, especially with the suspension of the dockworkers’ strike. Both of these are very positive news for the economy. If we continue to receive similar data, I will be more confident that we are indeed maintaining full employment. Of course, he also emphasized that this is just one set of data, and the central bank should not overreact to it. Regarding inflation, Goolsbee also mentioned that some data suggest that inflation may remain below 2% in the future, and since the Fed’s interest rates are still far from neutral, it would be more appropriate to lower rates significantly in the next 12-18 months. This statement indicates that although the pace may slow down, the Fed’s rate cuts will continue, unaffected by the latest nonfarm payroll report.
Today, Fed spokesperson Nick also commented, stating that this data essentially closes the door on a 50 basis point rate cut in November, but they will still ensure a 25 basis point cut in the future. He then mentioned that this report also indicates that the job growth in July and August was not as weak as previously thought. Officials had been concerned that they might have been behind in cutting rates when they saw the job growth at that time, but this report clearly alleviated that concern. Nick also noted that Powell mentioned they were not in a rush to cut rates, and this report undoubtedly underscores that statement. A 25 basis point cut in November aligns with the Fed’s overall recalibration strategy.
Former Treasury Secretary Larry Summers and Soros’s former deputy Stanley Druckenmiller also commented on the latest non-farm payroll data. Summers believes that in hindsight, the 50 basis point rate cut in September was a mistake, though not one that would have significant consequences. He stated that this report confirms the need for caution in future rate cuts in a high neutral interest rate environment. Druckenmiller echoed this assessment, taking a more hawkish stance. He believes that the latest non-farm payroll report may have backed the Fed into a corner on future rate cuts. He said, “I hope the Fed won’t be trapped by forward guidance as it was in 2021. GDP is above trend, corporate profits are strong, the stock market is hitting record highs, credit is very tight, and gold is at new highs. Where is the tightening? The message here is that the Fed should be more flexible and not paint itself into a corner by continuing to cut rates just because it previously said it would. If monetary policy is not tightening, then there is no need to cut rates.”
Overall, the comments from various parties suggest that while the Fed is likely to continue cutting rates in the future, we should have cautious expectations regarding the magnitude and pace of future cuts. If interest rates cannot significantly decline, investments in rate-sensitive assets such as small-cap stocks and government bonds may be limited in their gains. This is something to keep an eye on.
Reference article: WeChat Official Account “MeiTouinvesting”
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