The perverseness of investors was once again underscored on Friday by their positive reaction to the much stronger US jobs report for September, a rise in bond yields, and an apparent acceptance that the Fed's much-feared "higher for longer" monetary policy setting could persist for an extended period.
Fears of such an outcome—a stronger-than-forecast number of jobs—saw bond yields rise to 16 and 17-year highs ahead of the report's release on Friday. Simultaneously, the US dollar strengthened, and share prices fell in what seemed like a headless chicken approach by many investors.
A total of 465,000 new jobs were created—336,000 for September and an additional 119,000 positions in revisions for July and August. September's number was nearly double the market estimate of 170,000 and marked the highest monthly performance so far this year.
Wage growth exceeded expectations, with average hourly earnings up 0.2% for the month and 4.2% from a year ago, compared to respective estimates for 0.3% and 4.3%. This growth still outpaces the 3.7% rise in consumer price inflation over the 12 months to August (an update for September is due this week).
"Slowdown? What slowdown? The U.S. labor market continues to exhibit amazing strength, with the number of new jobs created last month nearly twice as large as expected," said George Mateyo, chief investment officer at Key Private Bank, to CNBC.
All this should have been negative for markets, given the fear and apprehension of the past week regarding what the Fed would do if the jobs report exceeded expectations. Nevertheless, the unemployment rate remained unchanged at 3.8%, compared to the forecast of 3.7%.
US economists noted that the growth was much broader than expected, with leisure and hospitality leading with 96,000 new jobs, followed by government (73,000), healthcare (41,000), and professional, scientific, and technical services (29,000). Motion picture and sound recording jobs declined by 5,000, down 45,000 since May due to labor strikes in Hollywood. Service-related industries contributed 234,000 to the total job growth, while goods-producing industries added just 29,000. Average hourly earnings in the leisure and hospitality industry were flat for the month but up 4.7% from a year ago.
The revisions to the previous two months were just as surprising as the September outcome—August's gain is now 227,000, up 40,000 from the prior estimate, while July increased to 236,000 from 157,000. Combined, the two months were 119,000 higher than previously reported.
Other measures of unemployment were stronger than forecast or remained at high levels, leading economists to suggest that the outcome and the revisions for July and August help explain the surge in job vacancies in August that surprised markets last week.
Consumer and producer price inflation data for September this week will likely trigger more market concerns about rate rises and cuts, especially if higher petrol prices push the rate back towards 4%.
The Fed meets on October 31 and November 1, with a statement and media conference by Chair Jay Powell on day two. Since March 2022, it has raised interest rates by 5.25 percentage points in an attempt to curb inflation, which is still running well ahead of the Fed's 2% target, with the Federal funds rate at 5.25% to 5.50%.
