Markets rally on softer jobs data, Fed pause

MANHATTAN (CN) — Lukewarm jobs data and a pause in interest rate hikes caused investors to break out of their recent slump, with the equities seesaw flipped following weeks of losses.

The Dow Jones Industrial Average netted 1,644 points for the week, making up much of the lost ground from the previous several weeks, while the S&P 500 gained 241 points and the Nasdaq increased 835 points.   

The moves on Wall Street correlated to cooling employment data released this week, starting on Wednesday when the payroll company ADP reported that private companies added 113,000 jobs last month — less than expected. Wage growth also slowed to a two-year low last month.

“No single industry dominated hiring this month, and big post-pandemic pay increases seem to be behind us,” Nela Richardson, ADP’s chief economist, said in a statement. “In all, October’s numbers paint a well-rounded jobs picture. And while the labor market has slowed, it’s still enough to support strong consumer spending.”

On Friday, the Bureau of Labor Statistics reported that in September the U.S. economy added 150,000 jobs, which was also fewer than what experts had forecast. The report similarly revised downward the last two employment reports by more than 100,000 jobs — August by 62,000 jobs, and September by 39,000 — taking some of the shine off those previous reports.

Experts say the slowdown reflected in the ADP report likely was caused by the automaker strike, as the Midwest saw a large drop in jobs. The bureau report also cited the strike: “Employment in manufacturing decreased by 35,000 in October, reflecting a decline of 33,000 in motor vehicles and parts that was largely due to strike activity,” the report noted. 

Investors had worried about another blockbuster jobs report similar to the one released last month, but the Federal Reserve again “paused” during its meeting this week and kept interest rates at the 5.25% to 5.5% range.

The Fed’s accompanying statement also showed little change from previous ones; it merely noted “tighter credit conditions” in the current economy, showing the central bank is taking a wait-and-see approach.

During the subsequent press conference Fed Chair Jerome Powell noted the Fed has been “attentive to the increase in longer-term yields” but cautioned investors not to believe the Fed couldn’t again hike rates. “The idea that it would be difficult to raise [rates] again after stopping for a meeting or two, it’s just not right,” he said.

Both the increase in Treasury yields and the U.S. economy’s strong growth during the third quarter have added extra pressure to interest rates, doing some of the Fed’s work for it.

“While there is still a chance that the Fed will squeeze in a final 25 [basis point’ hike at the December or January meetings if economic growth continues to surprise on the upside, the recent surge in long-term bond yields suggests that is increasingly unlikely,” wrote Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Still, some are cautious about Powell’s true feelings about the economy.

“To the extent that he is bluffing, it will be hard to know and it seems as if the market is taking him at his word that the Fed isn’t necessarily done hiking interest rates this year, let alone for next year,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.  

The Fed has hiked interest rates 11 times since March 2022. Its last meeting of the year is next month.

Much will depend on how labor markets develop over the next few months, but many experts see this week’s jobs data as an indicator of the economy’s new direction and the end to the Fed’s hiking cycle.

“The October jobs report showed a clear softening in labor market conditions with markedly slower hiring, cooling wage growth, an uptick in the employment rate, and a shorter work week,” said Lydia Boussour, senior economist at EY-Parthenon. She predicts unemployment will hit 4% by the end of this year and 4.4% by the end of 2024.

“While Fed policymakers will maintain the optionality of further tightening, we continue to believe that the Fed’s rightening cycle is complete,” she said.

Follow @NickRummell

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