Evening Brief – 11.03.23
Party On!
A weaker-than-expected US payrolls report and declining wage growth are just the cocktail the markets enjoy as equities rallied and government bond yields declined.
The October nonfarm payrolls data, which was previously predicted to be lower than September’s 336,000, came in at 150,000, below the consensus of 180,000 and the second lowest since 2022. The unemployment rate increased to 3.9% from 3.8%, above forecasts of no change.
The underemployment rate, U-6, rose to 7.2%, the highest level since February 2022. This is a larger measure of unemployment that includes those who are marginally linked to the labor force who work part-time for economic reasons.
The prior month’s data was revised lower: August was revised down by 62,000 to 165,000, and September was revised down by 39,000 to +297,000, marking the eighth month in a row with downward revisions.
Wage growth in October was 0.2%, down from 0.3% in September and below the 0.3% forecast. Wage growth was 4.1% on an annual basis, down from 4.3% the previous month.
The economy appears to be losing steam, as demonstrated by the jobs report and manufacturing figures released early in the week. It is important to note that a recession usually occurs after the Federal Reserve has completed its tightening cycle, and here is where the lags come into play.
According to history, a recession begins two years after the Fed’s first rate hike, which occurred in March 2022, and means a recession might occur in the first quarter of 2024.
“To say a recession is unavoidable after the most pernicious tightening cycle since 1981 may still be a low odd bet,” said David Rosenberg, president and chief economist & strategist of Rosenberg Research, on CNBC.
At the same time, however, they are opposing forces to a possible recession, including still historically low unemployment, only a slightly weaker economy (at this point), receding inflation and a generally robust consumer.
“Today’s numbers can be sliced and diced in any direction, but at the very least they won’t light any fires for a Fed rate hike in December. They support a soft landing — for now,” said Bloomberg’s Enda Curren.
As for the markets, this was the best possible collection of data as it means the Federal Reserve is done hiking interest rates. Indeed, for now the report was “bad news is good news” for the markets. Small Cap stocks and the Nasdaq added to their gains, each posting a 6% gain for the week. The US 10-year yield is now down 45 basis points from its 5% peak last month and the US 2-year yield is down 25 basis points from its high on Wednesday, effectively removing a quarter-point hike.
US bond yields are likely to continue to retreat, while the equity markets are expected to continue to rally as well, along with the help of a seasonally strong period.