Wow! September’s jobs data was extremely strong. August’s data was revised considerably higher. The statistics blew past all estimates by a wide margin as employers added 336,000 jobs in September, the most since January.
The unemployment rate held at 3.8% amid a surge of unemployed re-entrants looking for a job, while the participation rate remained unchanged at 62.8%. Average weekly hours were also unchanged, but wages increased 0.2% from the prior month and wage growth slowed from the prior year to 4.2%. This is the smallest annual advance since mid-2021.
The data increased the odds of another rate hike by year’s end as sentiment indicators are suggesting a 56% chance of such versus 48% before the data was released.
Longer dated Treasuries continued their unrelenting selloff, sending yields to a fresh 16-year high.
The curve has steepened significantly in the last 10 trading sessions as the yield on the 10 year and 30-year Treasury has increased 57 bps and 62 bps, respectively. The two-year Treasury, or the instrument most sensitive to monetary policy, has remained in a tight trading range between 5.05% and 5.12% for the same period.
This is perhaps suggesting the market is beginning to believe that inflation will not return to 2% and long dated debt must be repriced to accept such a possible eventuality.
Bloomberg writes this possible change in sentiment may have a significant impact on government finances. The Newswire writes “the higher rate means the US must shell out more to borrow….in the 11 months through August, the interest bill on US government debt totaled $808 billion, up about $130 billion from the previous year and about $370 billion from two years ago.”
Depending upon the source, approximately 30% to 35% of the nation’s debt must be rolled over in the next 12 months at sharply higher interest expense which may crowd out other expenditures as the interest on the debt may become the largest line item in the budget.
Changing topics, third quarter earnings season commences this week. Analysts believe the economic data is good for the economy and companies but perhaps not necessarily for the markets given current valuations and how the composition of valuation formulas whose largest component is interest rate.
Jeffries wrote third quarter earnings estimates for the S & P 500 have grown by 6.5% during the three-month period through September. That’s more than twice the average long-term upward move of 3.1% for the third quarter according to the firm.
Normally upwardly revised estimates bode well for equites but as inferred above, rising interest rates increases the hurdle rate for what is deemed as strong earnings.
Bloomberg writes net income for the S & P 500 is projected to grow about 7.6% year over yar in the period, snapping a run of four straight contractions. Third quarter earnings are likely to show profit fell slightly—0.3% for the period but this is a sharp rebound from the 5.7% profit drop of the three previous months according to the Newswire.
The economic calendar is comprised of several inflation statistics including the PPI and CPI, import/export prices, and small business and consumer sentiment indicators.
Last night the foreign markets were mixed. London was up 0.21%, Paris down 0.51% and Frankfurt down 0.73%. China was down 0.44%, Japan down 0.26% and Hang Seng up 0.18%. Dow and NASDAQ futures are down 0.5% and 1.0%, respectively. Oil is up about 4% as Israel declared war for the first time since 1973. How will this unfold? Is it noise or will it be something more significant. War is unquantified as the expected outcome almost never occurs. The bond market is closed for Columbus Day.
