Too Hot: Jobs Growth Near Estimates, But Still Too Strong for the Market's Liking

Jobs growth in September was right down the middle of the fairway at 263,000, according to the Department of Labor. Unfortunately for any bulls out there, the market appeared to be hoping for a slice.

 Major stock indexes retreated as investors gleaned the numbers.

The 10-year Treasury yield (TNX) flirted with 3.9%, up sharply from this week’s lows under 3.6%.

The jobs tally was basically in line with analysts’ estimates, and down from 315,000 in August. That may sound like progress considering the Fed’s efforts to slow inflation, but the devil is in the details.

The market has been trying to convince itself that the Fed is making progress fighting inflation, and the Fed continually points to the hot labor market. This report indicates that the Fed isn’t getting the job done, and the market is interpreting that the Fed may have to try harder to cool things down. That’s why we’re seeing a negative response to this report.

While slower headline jobs growth is good to see, it’s still quite high historically. And other statistics in the report like labor force participation and sector job growth also play into rising prices.

For instance, the report showed continued jobs growth in sectors like construction and manufacturing. These are the areas that should be responding to higher interest rates, which affect those industries in particular. If the report only showed growth in sectors like leisure and hospitality, which are more transient and lower paying, it would be a different story.

Anyone looking for a higher participation rate would be disappointed by this report, which showed that the rate barely budged to 62.3% in September. That’s still 1.1 percentage points below where it was just before the pandemic in early 2020. To be bullish, that number would have to rise. The theory is that more people seeking jobs could mean less pressure for stronger than normal wage growth.

It seems counterintuitive, but bulls may also be disappointed by the report showing the unemployment rate ticked down to 3.5%, from the previous 3.7%. A higher unemployment rate would reflect more people seeking jobs, and possibly less future wage inflation.

In a perfect world, everyone would have a great job that paid a great wage. But the Fed is worried that low unemployment could be causing unusually high wage growth, which can make the inflation situation messier. The unemployment rate and participation rate in this report don’t show that the Fed’s made much progress in the fight to keep wages in check. Average hourly earnings rose 0.3% during September, in line with Wall Street’s expectations. That’s up 5% year over year.

The average work week stayed steady at 34.5 hours, another sign that labor demand remains strong and that the labor market hasn’t really slowed much.

While 263,000 is a lower number for jobs growth than a month earlier, it’s still a decent amount that would have been considered on the high side before the pandemic. The Fed likely wants to see this number fall quite a bit further.

Potential Market Movers

After the jobs data, the CME FedWatch Tool showed an 81% probability of a 75-basis-point rate hike at the close of the next Federal Open Market Committee meeting November 1-2.. That’s compared with 75% just before the data was released and 56% a week ago. It looks like expectations are getting cemented for a fourth-straight 75-basis point hike.

Nothing coming out of the Fed in the days leading up to the payrolls data gave bulls any reason to climb onto the “Fed pivot” bandwagon that took the market higher on Monday and Tuesday. A speech by Fed governor Lisa Cook yesterday was the latest example. Although Cook noted that some of the upward inflation pressure has “begun to wane” in recent months, she concluded, “Inflation is too high. It must come down, and we will keep at it until the job is done.” It’s hard to see much of anything but hawkishness in a speech that ends like that.

Treasury yields and crude prices both climbed ahead of the payrolls report, extending Thursday’s moves.

Shares of Advanced Micro Devices AMD slipped more than 5% ahead of the opening bell after the semiconductor chip maker warned it would miss its prior guidance for the September quarter. It cited a drop in personal computer demand. This is just the latest salvo in what appears to be a growing demand struggle for the industry.

Reviewing the Market Minutes 

Just a bit inside!

That’s the kind of day the market had Thursday, when the S&P 500® (SPX) traded within the range of highs and lows posted the previous day. A sharp early decline that looked on pace to test Wednesday’s intraday low of 3,725 failed to find more sellers, and the SPX spent the rest of the day bobbing and weaving without much direction and with no major rally back toward the Wednesday high of just above 3,800.

All in all, this is not too surprising considering the data that lay just ahead and the significance it might have. It looked like people didn’t want to lighten or extend their positions much with the jobs report right on the horizon. Basically, it was a day of backfilling and consolidation following the big upward move earlier this week.

Selling appeared to pick up steam in the final hour of trading yesterday; something that often happens when the market is soft. It happened a lot last month as the bottom fell out. Persistently higher Treasury yields and a stronger dollar as the close approached contributed to Thursday’s bearish mood.

The Dow Jones Industrial Average® ($DJI) finished the day off 1.15% to close at 29,926.74, while the SPX gave up 1.02% to close at 3,744.49. The Nasdaq® (COMP) lost 0.68% to close at 11,073.31, and the Russell 2000® (RUT) had the “best” day, falling only 0.52%.

The 10-year Treasury yield ended the day at 3.82%, while the U.S. Dollar Index (DXY) finished just higher than 112.

In one slightly market-friendly sign, the inversion between the 10-year yield and the 2-year Treasury yield has narrowed to a little more than 40 points this week, down from highs of around 50 a week ago. It’s still historically wide, and an inverted yield curve is often associated with recessions. It also makes life hard for the banking sector, which begins reporting earnings late next week.

The Cboe Volatility Index®(VIX)finished the day higher and back above 30. It’s been pivoting above and below that round number for several days now, with 30 traditionally seen as an indicator of serious choppiness in the markets and a cause for increased caution. Still, the VIX has been generally well behaved; it hasn’t matched the May high of nearly 35.

Among individual stocks, McCormick MKC fell Thursday after missing consensus estimates for earnings per share as supply chain issues continue to grind away at the spice maker. Q3 marked just the third earnings miss in 15 quarters for MKC, according to MKC now has back-to-back quarterly misses, but the consumer segment of the company showed welcome growth.

Looking at the S&P sectors yesterday, it was a sea of red once again and quite a contrast from the start of the week. Utilities got pounded, falling more than 3%. This sector is one that many investors look to for dividends, but with Treasury yields at more than 10-year highs, utilities may have to fight harder for yield-seekers. The sector’s losses over the last month are worse than those of the broader market.

Thursday’s list of top individual stock performers was once again peppered with energy stocks like Occidental Petroleum OXYMarathon Oil MRO, and ExxonMobil XOM. Also, Tilray Brands TLRY spiked 30% and Canopy Growth CGC jumped more than 20% on news that President Biden pardoned all federal offenses of simple marijuana possession.

CHART OF THE DAY: Not Folding Yet. WTI crude oil futures (/CL—candlesticks) refuse to go quietly. Oil prices broke support around the $95 level at the end of July, but made another run in August. Sellers have struggled to hold the $85 price level and now oil prices are attempting to break the downtrend thanks to heavy production cuts from OPEC+. Historically, autumn and winter is when oil tends to seasonally underperform, because North Americans, the biggest consumers of oil products, tend to lockdown for the season and travel less, which greatly reduces  demand for oil and oil products. According to the Stock Trader’s Almanac, February has historically marked the bottom for oil. Data Source: CME Group. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Plugging in More Pickup: For the second time in less than two months, Ford (F) raised the price of its coveted F-150 Lightning electric pickup truck earlier this week. The starting price is now $51,974, which is 30% higher than it was at the vehicle’s May 2021 introduction. The Ford news came after Tesla’s (TSLA) deliveries disappointed Wall Street earlier this week, leading to some questions about whether luxury buyers might be tightening their wallets as the Fed tightens rates and the economy slows. The F-150 news runs contrary to that, however. And car sales in general had some positive news in September as they reached a seasonally adjusted annual rate of 13.5 million, up 9.6% from a year earlier, according to the National Automobile Dealers Association (NADA). “While not a return to normal by any means, inventory levels at the end of September 2022 should be above the bottom seen a year ago” and above the end of August’s level, NADA said in a press release. It added it’s seeing “some consumer pullback.” Still, the average new vehicle transaction price reached an all-time high of $45,622 in September, up more than 10% from a year ago, according to NADA. Also, about 14% of buyers even have monthly payments of more than $1,000, according to the automotive analytics firm Edmunds.

Retreat from Volatility? There’s currently a lot of scuttlebutt in the media about why the markets rebounded so quickly early this week from almost two-year lows. One reason that a few mentioned could be the approach of earnings season. As many might remember, it was Q2 earnings season when stocks began their impressive post-June recovery, so maybe some investors anticipate a similar lift if Q3 earnings come in better than expected. Sometimes the constant flow of earnings news has a way of centering investors’ minds. Some of the recent volatility could be explained by lack of corporate news and constant focus on stuff outside of companies’ control like geopolitics, the Fed, and poor economic numbers. Not that any of this necessarily goes away once earnings start (there’s a Fed meeting right smack in the middle of earnings season, for that matter), but sometimes strong results from major companies or a certain sector can re-focus Wall Street. Because in the long run, the main thing driving stock prices is earnings.

Raise a Mug: Speaking of consumer pullback, the tough economy apparently has some people switching to the beer aisle from more expensive wine and other liquors. At least that’s the takeaway from Constellation Brands (STZ), which reported strong quarterly results for its beer business but struggles in other alcoholic beverages. The company’s beer business grew more than 9% last quarter in the rate at which beer was shipped to distributors, with customers heading south of the border to drive sales of brands like Corona and Modelo. The company’s wine and spirits business lost ground, and STZ expects a fiscal 2023 net sales decline for the category. The company anticipated continued strong beer sales, however. It’s not safe to draw conclusions about the wider economy based on one quarter’s earnings from one company, just as it’s dangerous to look at TSLA’s weaker-than-expected quarterly deliveries and draw conclusions from that. What’s going to be interesting is getting all the quarterly data across the board and then making some economic conclusions once earnings season ends around Thanksgiving.

Notable Calendar Items

Oct. 11: Earnings from PepsiCo (PEP)

Oct. 12: September Producer Price Index (PPI) and September FOMC meeting minutes release

Oct. 13: September Consumer Price Index (CPI) and earnings from Delta (DAL), Domino’s (DPZ), Progressive (PGR), and Walgreen’s Boots Alliance (WBA)

Oct. 14: September Retail Sales, October Michigan Consumer Sentiment (early), August Business Inventories, and earnings from Citigroup (C), JPMorgan Chase (JPM), Wells Fargo &Co. (WFC), Morgan Stanley (MS), PNC Financial (PNC), U.S. Bancorp (USB), and UnitedHealth (UNH)

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC) 

Oct. 18: September Industrial Production, September Capacity Utilization, and earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), and Netflix (NFLX)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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