Baker Market Update
2023-10-06

It may not be a true “October Surprise” but this morning’s September jobs report was quite the shocker. Job gains came in nearly twice the estimate as the US economy added a whopping 336k jobs in September (vs. 170k forecast). The strong headline number and upward revisions to prior months suggest the labor market may not be weakening in the orderly fashion many expected. However, there was also some weakness in the underlying data. Most importantly for the inflation fight, wage growth underwhelmed estimates. Average Hourly Earnings rose just 0.2% (vs. 0.3% forecast) and 4.2% year-over-year (vs. 4.3% forecast).

Additionally, the household survey failed to confirm the headline number, coming in soft at +86k. The non-farm payrolls survey and the household survey are both conducted by the Bureau of Labor Statistics (BLS) but they measure employment using different methodologies. Non-farm payrolls is much larger and it surveys businesses while the household survey surveys private households and tends to be more susceptible to sampling error and volatility. However, despite these differences, the divergence between the two for the same sampling period is quite striking. The BLS also reported that the Unemployment Rate held steady at 3.8% despite the increase in jobs and the Labor Force Participation Rate also held at 62.8%.

Bond yields initially surged on the news but had given back much of the increase at the time of this writing. Interestingly, and somewhat surprisingly, the impressive jobs report has not been enough to persuade traders that the Fed will implement another rate hike this year. Fed Funds Futures still show a less than 50% probability there will be any more rate hikes in 2023 and a less than 30% chance of one at the November meeting.

Earlier in the week, private payroll processing firm ADP reported that US companies added just 89k jobs in September, far fewer than the 150k forecast and the smallest growth since January 2021. This is obviously in stark contrast to the non-farm payrolls report we got this morning and further muddies the waters as to where the labor market actually stands. Also unlike this morning’s NFP report, the ADP job gains were not widespread. The largest gains came in small businesses and leisure & hospitality (+92k) while large companies and professional & business services saw 32k of job losses.

As the markets continue to digest the report and try to ascertain the true state of the labor market, there is much to look ahead to next week for direction. Not only will we get the release of the minutes from the latest FOMC meeting, but there are several Fed speakers on the docket as well. We will also get the all-important CPI readings which will give us the first insight into how inflation fared in September. Hope everyone has a great week!