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Debt ceiling deferred, Wall Street focuses on deflating jobs report

The week was a net positive for investors, with big midweek gains wrought by a temporary patch to the debt-ceiling crisis hindered only slightly by a less-than-stellar jobs report on Friday that flattened indices. 

MANHATTAN (CN) — Multiple headwinds have been working against Wall Street, from the debt-ceiling quagmire to lukewarm jobs reports, but investors were able to sail steadily through into positive gains.

For the week, the Dow Jones Industrial Average gained 420 points, while the S&P 500 gained 34 points. The Nasdaq, which had suffered the greatest earlier in the week due to a run on tech stocks, gained only 13 points for the week.

Atop most investors’ minds was the debt ceiling battle on Capitol Hill, but by midweek a deal was imminent, and on Thursday the Senate voted 61-38 to kick the can on the debt ceiling to December 3, creating some breathing room for investors. Treasury Secretary Janet Yellen had warned a U.S. default would cause “irreparable damage to the U.S. economy and global financial markets.”

Most on Wall Street believe the debt ceiling is merely politics and that it would get raised eventually. “Although thoughts of an actual default or late payments were minimal, risk measures were adopted, which meant selling stocks for some,” wrote James Vogt of Tower Bridge Advisors. “For now, markets are happy and Democrats can focus on the two large spending bills awaiting votes, which will be positive for stocks.”

The debt ceiling crisis averted, markets were primed to move even higher. But bullish sentiment deflated Friday after the Bureau of Labor Statistics’ jobs report showed weaker job gains most experts had hoped, with just 194,000 non-farm jobs added last month.

Index futures fell on the news and remained flat through much of the day. By the closing bell, Dow, S&P 500 and Nasdaq each were slightly down for the day. 

The unemployment rate fell half a percentage point to 4.8%, and most of the job gains were in leisure/hospitality, retail trade, and transportation, BLS stated. The overall number was about 300,000 less than expected, but the Labor Department also revised its previous two months upward by more than half that amount, blunting the negativity somewhat.

“As shocking as today’s employment figures are, even more troubling is the decline in the labor force,” said U.S. Chamber of Commerce’s lead lobbyist Neil Bradley. “We are in the midst of a worker shortage crisis and the number of potential workers is shrinking. Multi-trillion tax-and-spend proposals in Washington will only make matters worse.”

The labor force participation rate declined slightly to 61.6% from 61.7% in August, and the rate has remained fairly stable since June 2020 and is still 1.7 percentage points lower than in February 2020. The BLS report also noted the number of long-term unemployed fell by nearly 500,000 in September to hit 2.7 million. That number is still 1.6 million higher than before Covid-related lockdowns began in February 2020, though.

President Biden, casting the disappointing report as a net positive, said the report shows a “solid” trend of 600,000 jobs created, on average, during the last several months. “In total, the job creation in the first eight months of my administration is nearly 5 million jobs,” he said. “Jobs up, wages up, unemployment down.”

The potential for a bad week on Wall Street began on Monday, when the Dow declined about 300 points, while the S&P 500 and Nasdaq dropped 57 points and 311 points, respectively, driven by tech stocks tanking.

Tech stocks now face major headwinds, which have been causing trouble the S&P 500 and Nasdaq generally. “More broadly, the tech sector is 28% of the S&P 500, which means that when tech can’t rally, the entire index has a hard time making gains,” wrote Tom Essaye of the Sevens Report. “And when tech is weak, as it has been for the past two weeks, the index can’t hold its ground.”

Essaye notes that rising yields and “regulatory headwinds” are building on the sector, but that also the Covid honeymoon for technology may be over soon. “The pandemic is once again receding, and if Dr. Scott Gottlieb (who has been one of the best voices on the pandemic since the beginning) is right, and delta was the last Covid wave, then tech just lost the pandemic behavior change tailwind that’s powered it for the past year-plus,” he wrote.

Monday’s route turned positive on Wednesday, however, when payroll company ADP reported 568,000 non-farm jobs were gained in September, surprising many analysts. Four-fifths of the gain was due to a massive 466,000-job increase in the services sector, and the gains were largely focused on large companies — which nabbed 390,000 jobs, compared with 63,000 jobs gained by small companies and 115,000 jobs among midsized companies.

The gains were a big improvement over the 340,000 jobs ADP reported were gained in August, and the report also stands markedly apart from what the Labor Department has been estimating — that zero jobs were gained in the leisure and hospitality sector last month. 

The ADP’s positive jobs numbers was good news for Federal Reserve hawks looking for the central bank to begin its quantitative easing of bond purchases. “In short, it looks like the gain in employment will qualify as ‘decent,” which is the threshold Fed Chair Jerome Powell has suggested for [pushing] ahead with a QE tapering announcement at the late-November meeting,” wrote Paul Ashworth, chief U.S. economist at Capital Economics.

He added that “it is worth remembering that the first estimate from the ADP is not a particularly good predictor of official payrolls, and even if employment growth is holding up well, GDP growth is not, with our estimate for the third quarter down to 2.6% annualized.” 

Even Friday’s disappointing BLS report may not be enough to dissuade the Fed from tapering, some say. Andrew Hunter at Capital Economics noted that while the report disappointing it “probably still counts as ‘decent’ enough for the Fed to begin tapering its asset purchases next month.”

Fortunately, additional unemployment data show claims are starting to dip back down again, after three consecutive weeks of rising. Only 326,000 initial unemployment claims were filed for the week ending October 2, a 38,000 decrease from the prior week and about 20,000 less than analysts had predicted. In total, the number of continuing claims for all unemployment programs dropped by about 855,000 for the week ending September 18. 

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