MANHATTAN (CN) — Wall Street looked to be in for a reversal of fortune early in the week but another positive jobs report — and the corresponding likelihood of higher interest rates next month — cut into the gains.
It was mostly rosy for investors until Friday, when the U.S. Bureau of Labor Statistics’ jobs report showed the economy gained 263,000 jobs last month, a sign the labor market is still strong but cooling. The report also noted that unemployment dropped to 3.5%, a 50-year low after it had picked up slightly to 3.7% last month.
Investors had hoped the jobs report would show a little bit more strain on the labor market, as it is likely the Federal Reserve will continue to hike rates aggressively. The Fed already has raised the federal funds interest rate from the 0%-to-0.25% range at the beginning of the year to the 3%-to-3.25% range. Experts believe the Fed will settle around 4.5% by the end of the year.
“The decline in the unemployment rate will likely frustrate the Fed as tight labor markets could drive up wages,” said Jeffrey Roach, chief economist at LPL Financial. “As long as job gains are strong, the markets should expect aggressive rate hikes by the Federal Reserve. We will likely see another 0.75% increase to the Fed funds rate in November.”
Earlier in the week, markets picked up huge gains, mostly on Monday and Tuesday, when the Dow Jones Industrial Average increased by 765 points and 826 points, respectively. Those gains began to moderate on Wednesday, though, and by Friday’s closing bell the Dow was up only 572 points for the week. The S&P 500 increased 54 points for the week, while the Nasdaq gained just 77 points.
On Thursday, jobless claims for the week ending September 24 ticked up by 219,000, giving investors some hope that the jobs market was coming back to earth. Investors are cognizant, however, that unemployment claims are watched less by the Fed than other data points.
“Any easing of labor market conditions will be welcome by the Fed but won’t change the FOMC’s plans to continue to raise rates in an effort to bring down inflation,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote in an investors’ note. “The labor market should still be characterized as tight, with the ratio of job openings to unemployed workers still elevated in August despite a small decline.”
Other jobs data from earlier in the week support the theory that the labor market is cooling off. On Tuesday, the Labor Department’s measure of job openings and labor turnover — known as JOLTS report — found that job openings fell by 10.1 million in August, while hires and separations largely remained stable.
The Fed pays close attention to the JOLTS report as an important signpost for the labor market, and it will likely take note of both the ratio of unemployed per job opening — which fell to 1.7 in August, the lowest it has been since late 2021 — and the fact that more employees quit their jobs in August than did in July.
On Wednesday, payroll company ADP released its monthly employment report, finding the U.S. economy picked up 208,000 non-farm jobs in September, a gain over the 185,000 the company reported were gained in August. The gains were fairly spread out among small, mid-sized and large corporations, but the transportation and utility sector saw the biggest increase, making up 147,000 of the total gained jobs.
Nela Richardson, chief economist at ADP, noted that the current market is “in an interim period” where employer demand remains robust and employee supply is improving.
However, many experts believe growth and jobs are in for a rough period ahead. “This has been a disappointing year for the U.S. economy with two consecutive quarters of falling output,” wrote James Knightley, chief international economist at ING. “It will be worse in 2023.”
He notes that consumer spending and corporate capital expenditures are sure to fall next year, with unemployment rising, the housing market continuing to falter, and mortgage rates still creeping higher. Knightley is confident, however, that inflation will finally break, and the Fed will begin to reverse course on its rate hikes in the latter half of 2023.
“Once the Fed has hit the pause button on rate hikes, the market will swiftly move to anticipate rate cuts,” he wrote. “We expect them to start coming through from the third quarter of 2023 as the Fed seeks to prevent a more prolonged downturn that could result in inflation falling well below 2% over the medium term.”
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