Despite a hurricane-impacted loss of 33,000 jobs in September, Friday’s employment report came in better than expected in other respects, raising prospects of a rate increase by the Federal Reserve later this year.
The net loss in jobs, the first since 2010, was directly related to Hurricanes Harvey and Irma and seen as temporary. It was therefore eclipsed by the positive elements in the report, including a drop in the unemployment rate to 4.2%, the lowest since 2001; a 0.5% jump in average hourly earnings, 2.9% on a year-to-year basis, well above the Fed’s 2% inflation target; and an unexpected rise in the labor participation rate to 63.1%, the highest level this year. Those figures basically validated the Fed’s belief that the job market is tightening and will lead to higher wages and inflation. That raised the market consensus to near 100% for a December rate rise by the Fed, assuming nothing major happens in the meantime.
Stock prices initially fell on the news on Friday, ending largely unchanged for the day, but were solidly in the green for the week, while bond yields jumped following the report before easing back down later. All three major equity indexes gained more than 1% for the week. In the bond market, the yield on the benchmark 10-year Treasury note hit 2.40% immediately after the release of the jobs report but settled down to 2.36% by the end of the trading day, putting it at its highest closing level in three months. Oil prices dropped 5%, closing the week below $50 a barrel.
European and Asian stocks were mostly higher for the week except in Spain, although prices recovered from their lows following the election in Catalonia to secede from the country. The IBEX 35 index was down 1.9% for the week although it had been down as much as 4% earlier in the week. The yield on the 10-year Spanish government bond closed the week at 1.66%, up five basis points on the week, after reaching 1.80% on Thursday, its highest level since March. The region voted to leave Spain, an action that is being strongly opposed by the Madrid government. Elsewhere, the Stoxx Europe 600 rose 0.3%, its fourth consecutive weekly increase. In Asia, Hong Kong’s Hang Seng index jumped another 3.3% to raise its year-to-date gain to more than 29%, making it one of the world’s hottest stock markets this year. Mainland Chinese markets were closed all week for a holiday. Japan’s Nikkei 225 gained 1.6%, its fourth straight increase; the index has risen more than 7% in the past month.
Other reports released last week showed continued strong U.S. economic growth. The Institute for Supply Management’s two indexes both came in much better than expected, climbing to multiyear highs. The manufacturing index rose two points to 60.8, its highest reading since May 2004, while the nonmanufacturing gauge, which covers most of the economy, jumped 4.5 points to 59.8, the best level in three years. Separately, the Commerce Department said factory orders climbed 1.2% in August, rebounding from a 3.3% decline in July, while construction spending rose 0.5% after falling a downwardly revised 1.2% the prior month. Auto sales rebounded in September, rising more than 6% compared to the same period last year; sales even got a boost from the hurricanes, as consumers bought new vehicles to replace those lost to the storms.
Reports/dates/facts/links worth paying attention to over the next week:
1. October 9: U.S. banks closed but financial markets open for Columbus Day.
2. October 11: The minutes of the September 20 Federal Open Market Committee are released at 2:00 P.M. EST.
3. October 12: Weekly unemployment claims; producer price index for September.
4. October 13: Consumer price index for September; retail sales for September; University of Michigan consumer sentiment index for October, first reading.