Federal Reserve May Take Center Stage Again This Week

Central banks appear to be under the spotlight again after Friday’s tepid jobs report, and the debacles and anxiety that are popping up in Europe. How will the markets absorb these matters this week?

Ahead of Friday’s close, the markets were on pace to post their first weekly loss in four. Some of that may have been owing to what Stanley Fisher, Federal Reserve vice chairman, described then as a jobs report that was "pretty close" to a "Goldilocks" number—not too hot and not too cold. Or, as Cleveland Fed President Loretta Mester called “solid numbers.” Both referred to the results as “consistent” with their own expectations, underscoring the resilience that the economy appears to have.

They weren’t, however, harmonious with Wall Street’s projections. The 156,000 new jobs produced last month fell short of the Street’s outlooks that ranged from 166,000 to 175,000. Unemployment inched up to 5% from 4.9%, another forecast that wasn’t on the radar.

What could that mean for the Federal Reserve? Most likely nothing that Wall Street may already have been anticipating, and that’s a step up in interest rates in December by about 0.25 basis points, according to the Chicago Mercantile Exchange’s FedWatch futures tool. Before the jobs report and the Fed member chatter Friday, the likelihood of an increase in December was at 63%. By midday, it had shot up to 70% and the three major benchmarks had taken decidedly sharp turns to the downside.

Fed, Fed, Fed. What Else is Out There?

The economic calendar is loaded with some potential market movers, like unemployment claims, the Producer Price Index and retail sales at the end of the week. But what may be more interesting to many traders will be, yes, more of Fed, Fed, Fed. The FOMC minutes from its September meeting are on Tuesday’s agenda.

You might remember that though the Fed decided to hold tight on interest rates, Chair Janet Yellen made it clear that one was on the table for this year, noting that November’s meeting is still what she refers to as a “live” one at which members might vote to bump the overnight rate at least 0.25 basis points. Mester said Friday that November’s meeting was still indeed a “live” one. Let’s not forget, too, that September’s meeting was the first time in a long while that three members dissented. Are there more now, especially after Friday’s jobs report?

Last week we saw the S&P 500 and the crude-oil prices move in lock step again, with West Texas Intermediate (CLX6) futures climbing over the key $50.00 a barrel mark. But on Friday, they were heading lower, with CLX6 slipping below that level. And gold, which in normal times would likely be heading higher as a safe-haven asset, continued to drop.

As noted, the U.S. added 156,000 jobs last month, putting it on an average year-long pace of 178,000 jobs a month. That’s down from 228,000 in 2105 and 251,000 in 2014, which means job growth is slowing. But Wall Street analysts note that’s supposed to be happening when a bigger percentage of the population finds gainful employment. Private-sector payrolls swelled to 167,000 new jobs in September compared with an upwardly revised total of 144,000 in August, the Labor Dept. reported.

“The largest miss was in the government sector as opposed to the private sector, which was reassuring given the slowdown in overall economic growth we have seen this year,” Diane Swonk, founder of DS Economics, said. “State and local hiring is losing momentum after driving gains in recent years.

“More encouraging was the composition of job gains, which were dominated by professional hires; they surged 67,000, mostly full-time over temporary hires,” she added. “That confirms that college graduates are regaining ground lost to the crisis, and adding to wage growth.”

About that Unemployment Number. It did tick up to 5% from the 4.9% it has held at since spring. But it’s not as bad as it might appear on the surface.

Part of the reason is that the participation rate ticked up to 62.9% from 62.8% in August. Not a terribly big kick, but showing that more people went out looking for jobs and found them, taking at least some of those discouraged workers off the sidelines, according to the Labor Dept. What’s more, when labor markets are tight, as they appear to be in some sectors, that leads to higher wages. That’s something Fed Chair Janet Yellen has been targeting all these many months. Hourly pay edged up 0.2% in September to $25.79 an hour, bringing the year’s gains so far to 2.6%. The amount of hours employees worked also crept higher to 34.4 per week.

“The improvement in average hourly earnings growth and hours worked is particularly encouraging, suggesting that the average worker is finally benefiting from the economic expansion and tightening labor market,” said Scott Anderson, chief economist of Bank of the West.

All this doesn’t mean that there still aren’t scores of unemployed or underemployed workers out there, according to the Labor Dept. That so-called U-6 measure of employment, which also included part-time workers who want full-time jobs, still stands at 9.7%.

The Silver Linings of Jobs Report. Oil-patch employment held steady in September, the first time in 23 straight months. One month, of course, doesn’t make a trend but it could be a harbinger of what’s ahead in the employment bust in the energy sector. And if oil prices do stabilize in a $50-a-barrel or near range as some analysts are predicting, the energy sector may have finally stopped the bleeding, they say.

Energy companies added 95 drilling rigs for a total of 425 in the U.S., according to energy services firm Baker Hughes. MarketWatch notes that although that is still far away from the 614-rig count a year ago, it was the first uptick since early 2014.

Since then, the industry has slashed some 220,000 jobs—or one-quarter of the entire sector—as oil prices dove.

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