Stocks plunged today in response to the September jobs report, released this morning. The Bureau of Labor Statistics (BLS) said that the US economy added 263,000 jobs last month, missing the Dow estimate of 275,000.
And though a weaker-than-expected jobs print would be cause for celebration these days, unemployment ended up falling, too. The jobless rate dropped from 3.7% in August to 3.5% in September, squashing bullish hopes of a Fed pivot in the coming weeks.
“While the data was about as expected, the drop in the unemployment rate is seemingly what the markets are obsessed with because of what it means for the Fed,” said Peter Boockvar, chief investment officer of Bleakley Financial.
“When combined with the low level of initial jobless claims, the pace of firing’s remains muted and this of course gets the Fed all fired up about continuing with its aggressive rate hikes.”
That’s really what it’s all about, isn’t it? If the Fed continues to raise rates, stocks will enter a bear market continuation. If it signals any sort of dovishness, stocks should rip higher.
Bloomberg Economics’ chief US economist Anna Wong believes the September jobs data may have cemented a more hawkish Fed.
“The robust September jobs report significantly bolsters the case for a fourth consecutive 75-basis-point hike at the November FOMC meeting. The labor market remains tight, and the supply of workers isn’t growing fast enough to bring down wage growth,” Wong said.
“Adjusted for slowing productivity growth, wage growth is running at least triple the pace consistent with the Fed’s price target. Concerns about a wage-price spiral will keep the Fed hiking well into 2023 until rates reach 5%, in our view.”
The most important call of the day came from the Wall Street Journal’s Nick Timiraos, who is now viewed by many as a mouthpiece for the Fed.
Timiraos wrote this morning that “the September solid employment report is keeping the Federal Reserve on track to approve another large interest-rate increase at its meeting next month as officials seek to lift borrowing costs high enough to soften the labor market and ease inflation pressures.”
Translation: Don’t expect a Fed pivot any time soon.
The only hope for bulls now is a breakdown (or near-breakdown) of the US financial system like the UK endured last week, prompting a swift rescue from the Bank of England when British government debt was faced with a “death spiral.”
“The conclusion many we have spoken with have reached is that not only will the Fed not help markets, but in their dogged pursuit of price stability keep going until something breaks in the capital markets,” said Wells Fargo Securities analyst Christopher Harvey.
“What appears to be their increasingly singular focus — price stability — will likely help catalyze the dislocation.”
With liquidity drying up as a result of massive reverse repo operations, bonds seem to be the most vulnerable asset right now. A UK-like meltdown in the US would force the Fed into a quantitative easing (QE) “reboot,” pleasing bulls in the short term.
Even though the long-term implications of such an event would be highly bearish.
