Jobs report shocks the market.

This week has been a wild ride after several important economic reports. The recent trend of economically bad employment data was abruptly halted by a blockbuster jobs report from the Bureau of Labor Statistics (BLS). This has caused rates to pause their downward slide, though likely only temporarily. Rates this week ended about 0.25% higher than at the beginning. So, what did we see that affected rates?  

The week began with some continued geopolitical turmoil in the middle east with escalating tensions between Iran and Israel. We saw a large number of missiles being launched at Israel.  Tensions don’t appear to be easing. This type of global uncertainty can cause investors to do a “flight to safety” into secure investments like mortgage-backed securities (MBSs). That is generally good for interest rates.  

The Longshoremen’s union began a strike that could have crippled the U.S. economy as a majority of the U.S. ports are controlled by the union. All goods going into and out of these ports would basically sit on the dock and the ships. On Friday, news broke that the union had reached a deal to end the strike until January 2025. This is great news for the economy and for inflation, which could have been very bad for interest rates.

The August JOLTS (Job Openings and Labor Turnover) report was released and showed that job openings rose from 7.7M to 8M. As we have discussed previously, this number doesn’t have the weight it used to due to the post-COVID job postings that can see the same job posted in multiple markets due to our current work-from-home environment. The hiring rate fell from 3.5% to 3.3%. This is the lowest level since 2013 (excluding COVID). Even COVID had a level of 3.1%, so we aren’t far off of that level. The important Quit rate tells us how confident people feel in their ability to get a new/better job. This rate fell from 2% to 1.9%. This is the lowest level since 2015, excluding COVID.  

The Institute for Supply Management (ISM) put out their Manufacturing Index for September.  This came in at 47.2% (anything less than 50 means contraction/shrinking of the sector). The employment component fell from 46 to 43.9, which is in deep contraction. Also, the “prices paid” component showed the biggest decline to 48.3%. This is great news for continued inflation reduction.  

The ADP employment report showed that 143,000 jobs were created in September vs the estimates of 120,000. August’s report was revised slightly higher by 4,000. The small business component of the report showed 8,000 jobs were lost. The most important part of this report was the reporting on wages. ADP reported that annual pay for job stayers (staying in same job for over 1 year), increased by 4.7%. That is a decline from 4.8% and is the slowest increase since July 2021. Job changers saw an increase in wages of 6.6%, which is much lower than the 7.3% we saw in August. This also supports the results of the JOLTS report. These results show a decline in wage pressured inflation which is good for interest rates. 

A smaller but important job report is the Challenger Job Cut report. This report showed that September’s job cut announcements were about 50% higher than the previous year. Company hiring plans are showing the lowest levels in 11 years. To illustrate this, September showed hiring plans for 403,891 jobs, but over 401,000 of those were seasonal employers and only 2,000 were non-seasonal employers. September 2023 showed 590,353 jobs in hiring plans, of which 40,000 were non-seasonal. That is a huge drop from 1 year ago.    

The final big news this week was the BLS Jobs report. Remember, there are two different job reports contained in this monthly report. First, the Headline Job number comes from the Business Survey report and it showed 254,000 jobs created, which came as a surprise when only 140,000 were expected. Last year’s September headline number was also a shocker, but was later revised lower. The Birth/Death model, which statistically projects small business job creation and has been the subject of conversation in regards to its accuracy recently, showed a 128,000 job loss. This is actually worse than even ADP’s 8,000 job loss, which wasn’t helpful for interest rates. The biggest job gains were in Leisure/Hospitality with 78,000 gains, Healthcare with 45,000, and Government with 31,000. Weekly hours worked decreased from 34.3 to 34.2 on average. This was the one piece of bond-friendly news.  

The second component is called the Household Survey. This is where we get the unemployment rate. This survey showed 430,000 in job gains. The unemployment rate fell from 4.2% to 4.1%. Unlike most of the recent Household Surveys, we saw a large increase in full-time jobs created at 414,000. It showed 95,000 part-time jobs were lost. This doesn’t seem to make sense given the average hours worked decreased. You would expect to see this number increase. We will see what gets revised in the future. Another curiosity in the report was that of the 430,000 jobs created, 231,000 were from people aged 16-19, and 159,000 were for 16 and 17-year-olds. This is a strange increase to observe, given that school has started back.  

The mortgage market didn’t like this BLS report at all. This could give ammunition to the Federal Reserve (Fed) to cut less aggressively. Since this is the only Jobs report that has been this economically positive, we really need to see if this improvement continues. Remember, rates don’t go down in a straight line. There will be small bounces back up. The trend is still clearly lower.

Looking Ahead:

Next week is another week of inflation reports:

• Wednesday: ADP Employment Report
• Thursday: Initial and Continuing Jobless Claims, Consumer Price Index (CPI)
• Friday: Producer Price Index (PPI)