U.S. Jobs Data Preview: Stocks Hope for a Rise in Unemployment
Nov 2, 2023
The markets were imbued with optimism as the Federal Reserve took the most official steps yet to signal its rate hike cycle has ended. How long this cheery mood continues will now be tested by the arrival of October’s U.S. employment data.
The U.S. economy is expected to have added 180,000 jobs to nonfarm payrolls in October. That’s a climb-down from the 336,000 rise in the previous month. The unemployment rate is seen holding steady at 3.8%. The growth rate of average hourly earnings, a measure of wage inflation, is expected to slow to 4%, the lowest since June 2021.
For stock markets, the hope is almost certainty for an outcome that isn’t too much hotter than expected.
The first move in the upcoming rate cut cycle is now all-but-fully priced in for June. That’s a modest upshift in the timeline compared to the prevailing wisdom before yesterday’s pronouncement from the U.S. central bank’s Federal Open Market Committee (FOMC). Three cuts are also fully bake in for 2024.
Confidence in this “sooner and lower” take on incoming stimulus might be shaken if the jobs data outperforms. On this front, the jobless rate might be the most important variable. Officials stress that they expect dislodging sticky inflation will demand wage-resetting layoffs, reflected by a rise in unemployment. Federal Reserve Chair Jerome Powell suggested as much again in the press conference following November’s FOMC conclave.
Leading purchasing manager's index (PMI) data pointed to a slowdown in hiring in October, with manufacturers shedding jobs for the first time since July 2020. Hiring continued in the service sector, with diminished vigor compared with the prior month. That lines up with analog manufacturing PMI figures from the Institute of Supply Management as well as evidence of an upward trend change in jobless claims data.
Taken together, this seems to support the case for a rise in the headline “U3” unemployment rate. Stock markets are likely to cheer such a result, treating it as an endorsement of the dovish adjustment in Fed policy bets. The U.S. dollar will probably come under renewed pressure while bonds tick higher in this scenario.
The impact of the late-September expiration of pandemic-era childcare benefits could be a wildcard in this calculations. If it pulls parents from the workforce, a drop in the participation rate might translate as an unexpected jobless rate decline. This might complicate the narrative for markets at first, but the limited implications of such statistical noise for the Fed outlook might make its influence fleeting.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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