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September Jobs Report Surprises Wall Street

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Andrew R. Michaud

• October 06, 2023

Last Friday, Wall Street was taken aback by the release of the better-than-expected official jobs report for September. Traders and investors were left considering the increasing likelihood of another rate hike by the Federal Reserve in less than four weeks.

The United States saw the creation of 336,000 new jobs last month, almost double the number economists had anticipated. This unforeseen surge led fed funds traders to raise the probability of a 25-basis-point rate hike on November 1st to 28.6%, up from the previous day's 20.1%. Additionally, the bond market witnessed a sell-off in Treasuries, resulting in the policy-sensitive 2-year rate BX:TMUBMUSD02Y climbing further above 5%. In fact, its longer-term counterparts reached highs not seen in 16 years.

This marks the second occasion this week where the robustness of the US labor market has compelled bond traders to reassess their expectations for interest rates. On Tuesday, job openings data indicated a strong demand for labor and caused 10- and 30-year rates to reach their highest levels since August-September of 2007. Then, on Wednesday, bond traders heavily invested in contracts and wagered record amounts on the outcome of the Fed's upcoming meeting on October 31st to November 1st, mostly in anticipation of a rate hike.

Strong Jobs Data Raises Expectations of Rate Hike

Friday’s jobs data has exceeded expectations, leading to speculation that the Federal Reserve may raise interest rates before the end of the year. The report has sparked a debate among experts, with some believing it increases the likelihood of a rate hike on November 1, while others maintain that December is a more plausible option. Regardless of the specific timing, a quarter-point rate hike would result in the Fed's main interest-rate target reaching 5.5%-5.75%.

Divided Expert Opinions

Prominent firms like Goldman Sachs are taking a different stance, declaring that the central bank is likely finished with its rate-hike campaign. However, Omair Sharif of Inflation Insights believes that December is a more suitable time for the Fed's next move.

Selloff in Treasurys Subsides

The aggressive selloff in Treasurys, triggered by the September jobs report, has largely faded by last Friday morning. As a result, all three major U.S. indexes - DJIA, SPX, and COMP - have experienced an upward surge.

Conclusion

While the strong jobs report has ignited a debate about the possibility of a rate hike in the near future, there are conflicting opinions among experts. Only time will reveal the exact course of action the Federal Reserve decides to take.

Nonfarm Payroll Report Increases Likelihood of November Hike

According to Matt Peron, the research director for Janus Henderson Investors in Denver, Friday's nonfarm payroll report has certainly increased the likelihood of a November hike. However, Peron is not completely convinced if it will be enough to push them over the line. He believes that the consumer price index for September, which will be released next Thursday, will serve as the deciding factor.

It is apparent that the nonfarm payroll report has played a significant role in shaping the possibility of a November hike. However, Peron emphasizes that further analysis and consideration of the upcoming consumer price index is necessary for a final decision. Stay tuned for more updates on this matter.