Non-Farm Payrolls Report Shocker

An interesting day with the Non-Farm Payroll report that came as a major surprise to all of us. We were expecting new jobs of around 180,000 and the report showed 336,000 new jobs added. This is much higher than expected.

Digging Into the Data

An important issue to note here is the revisions. Since January, we’ve been seeing that the first payroll number is revised down. So, the actual jobs created were lower than reported. This time we saw the revisions go up by 119,000 for July and August. This means that the labor market probably is getting stronger again.

One way to explain this is the government benefits going away. During the pandemic we had a situation where there we a lot of government benefits given to people and that created a lot of wealth and excess savings.

Now those benefits such as the pause of student loan repayments are being stopped and because of inflation, excess savings have gone down. This means people who have not been actively involved now have to go back to work.  

We can see this in the nature of the new jobs created. The major category for new jobs was restaurant jobs. This is usually part time work.  

We can also see this match the Household Survey which showed only 86,000 jobs being created. The unemployment rate remained the same at 3.8%.

The Household Survey shows us the picture of employment status while the Establishment survey shows us job numbers. Details of the household survey show:  

• Re-entrants went up by 113K 

• Net Part-time workers went up by 21K 

• People with Multiple Jobs went up by 123K 

• While temporary jobs went down by -56K and new entrants went down by -29K 

These numbers won’t add up to 86K because they are from different categories. But, they paint the picture that people who were once not working or didn’t have to work, are now seeking out jobs.  

Now in terms, of the Average Hourly Earnings and the Average Work Week that did not change much. Here lies some more hints as to what is going on. It’s the lower paid jobs that got the most attention. Yet again, these are likely the more temporary jobs. While this is a good sign for the sticky core inflation, it doesn’t exactly boost our confidence in the strength of the job market and the economy at large.  

We think that this job report reflects what is likely a more temporary phenomenon because of the summer months and the need for a sector of the population to go back to work to supplement their income.  

The recent quits reports also ties in with this, in that there wasn’t much movement in that. People are not rushing to quit their jobs and that implies a certain level of worry. Finally, we also saw the Challenger Job Cuts report yesterday which showed a significant increase in job cuts in retail services.  

What Does This Mean for the Market?  

As we saw, the initial market reaction was negative, but once again we saw support come in just around the 200-day moving average in the S&P 500. With a familiar Friday theme adding to momentum, a mega cap-led rally driven by 0DTE call buying.

Bond yields went up particularly at the long-end, illustrating that the market is more concerned about economic strength than anything resembling a recession based off of that strong labor print, further repricing of the resolve of the Fed’s policy with odds of a December 25 bps hike rising to nearly 40%, and an increasing appreciation that the long-end may need to be repriced as it doesn’t make sense to lend at 30-years at a lower rate than 30-days. 

A continuation of the bear steepener theme we’ve seen over the last few months is something that we expect moving forward, steepening into positivity over the next several months. Particularly given several key factors: 

• Elevated US government debt issuance, and more within longer tenors pushing up longer end yields 

• Rising risk of a government shutdown as the situation in the House whereas no Speaker may be elected by the time the continuing resolution runs out in November. A holiday recess potentially starting shortly thereafter could also make that shutdown last longer. 

• This may lead to further downgrades of US debt. 

• There is also less demand for US sovereign duration from international investors, including Japan, China, and Saudi Arabia. Some of whom have become net sellers. 

Monetary Policy Impacts

With a strong labor market, the Fed can now raise policy rates further and they can hold the rates at this high level for longer. The Fed’s projection for unemployment is 3.8% and currently we are at 3.8%. If this remains steady, the Fed may have reason to hike again in November.  

These convergent dynamics present a rather odd situation, because a strong labor market is the main reason that the Fed’s monetary policy tightening is taking longer than expected. Thus, the Fed is raising further to counteract that.

Why it Matters for Investors and the Economy

This will obviously have a negative effect on stock and bond prices, as the values will decline. We are also concerned about Q3 earnings. With higher rates, we will see the cost of capital for companies going up and less business investments.

Similarly, a rising dollar puts pressure on overseas earnings. At the same time, however, we may see demand decline so there may be less revenue, creating a more permanent downward shift in businesses.  

This could in turn lead to rising defaults on debt and may even cause more bankruptcies. Something that we are already experiencing and we believe that this will increase.  

Ultimately, holding rates higher and for longer period of time may push the economy into a recession.  

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