October 6, 2017

Stocks sank at the open after a disappointing jobs report. The Dow is currently down 33 pts and the SPX is down .28%. Just about everything is in the red except for gold miners, semiconductors and healthcare stocks. The VIX Index, which has been languishing below 10 for over a week, is up a bit to trade around 9.8. VIX October futures are up slightly to trade around 11. That’s not much of a move. Commodities are lower on the day; WTI crude oil is down 3% to $49/barrel. Despite a weak day for stocks, bonds are selling off as well. The 5-year Treasury yield shot up to 1.96% and the 10-year yield rose to 2.36%. It seems bond traders didn’t like the jobs report for a different reason—rising wage inflation. 

The US economy lost 33,000 jobs in the month of September compared with economists’ consensus forecast for a gain of 80,000. Recall that ADP’s report earlier this week encouraged us to think this would be a positive number, so it is a bit of a shock. Of course, the twin hurricanes were largely to blame for the weak job tally. Employment at restaurants fell by over 100,000 and that impact was largely attributable to the storms. The national unemployment rate fell to 4.2% and the underemployment rate—including those working part-time because they can’t find full-time work—fell to 8.3%. That’s the lowest underemployment rate since the middle of 2007. Despite weather-related disruptions, the job market remains tight and we even got an increase in the labor force participation rate to about 63.1%. That’s the highest rate since March 2014.

The real story of this report, however, is that average hourly wages rose a much higher than expected 2.9% from year-ago levels. That’s the fastest rate of wage growth since the middle of 2009. And August wage growth was upwardly revised to 2.7% growth from the 2.5% initially reported. So clearly the inflation picture is changed after this report. My view is that this report just gave the Federal Reserve a great excuse for hiking interest rates in December. 

Yesterday’s jobless claims and job cut reports corroborate a strong labor market. Layoffs as measured by private research firm Challenger, Gray and Christmas (referred to as the Challenger Job Cut report) fell 27% from year-ago levels in September. Corporate layoffs have been in a general down-trend since mid-2015. Separately, initial filings for unemployment insurance, which spiked due to the twin hurricanes, fell back last week. Initial claims have been very low by historical standards for the past few years, and the weakther impact is seen as temporary. 

US factory orders jumped a better than expected 1.2% in August from prior month levels. A good bit of that gain was due to a temporary surge in orders for commercial aircraft. But stripping out the more lumpy transportation and defense equipment categories, orders for factory goods are up about 4.0% from year-ago levels. Businesses are investing again for growth. CNBC reports, “Strong business spending on equipment is helping to underpin manufacturing, which makes up about 12% of the US economy. Business investment in equipment grew at its fastest pace in nearly two years in the second quarter.”

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