US Payrolls Spring an Upside Suprise

For the week ending 4 October 2024

As of midday Friday, global equities were slightly lower on the week as geopolitical uncertainty offset surprisingly strong US employment data. On the week, the yield on the US 10-year Treasury note jumped 0.20% to 3.96% amid hawkish Fed comments and upbeat payrolls. The price of a barrel of West Texas Intermediate crude oil rose $6.35 to $74.25 on fears Iranian oil production could be disrupted. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 20.4 from 18.3. 

MACRO NEWS

Jumbo rate cut odds slip as US payrolls jump

US nonfarm payrolls exceeded all estimates in the Bloomberg survey, rising 254,000 in September compared with a consensus estimate of 150,000. Additionally, the prior two months’ payrolls were revised up by 72,000 and the unemployment rate declined to 4.1%. Average hourly earnings rose a robust 0.4% while the participation rate held steady at 62.7%. Markets quickly adjusted following the strong data, trimming the odds of a larger than 0.25% rate cut at the 7 November FOMC meeting to 0% from 35% ahead of the numbers. The odds were more than 50% before Federal Reserve Chair Jerome Powell spoke early in the week. Yields, especially on the short end of the curve, rose sharply on the news, with the US 2-year Treasury note yield jumping 0.18% to 3.89%, flattening the 2s-10s curve.

Fed’s Powell: No need to hurry

Fed Chair Powell addressed the National Association of Business Economists this week, commenting that the FOMC “is not a committee that feels like it is in a hurry to cut rates quickly.” Powell said that two more quarter-point rate cuts before year-end remains the Fed’s base case if the economy evolves as expected. He added that there doesn’t need to be any further cooling in the job market to achieve the central bank’s 2% inflation goal.  also observed that recent upward GDP revisions remove some downside risks to the economy. On balance, markets interpreted the comments as hawkish and moderately reduced rate-cut expectations.

Mideast tensions boil over

Iran launched an estimated 180 ballistic missiles at Israel on Tuesday, though most were intercepted by missile defense systems. The barrage came in reaction to Israel’s assassination of Hezbollah leader Hassan Nasrallah, as well as a series of targeted covert actions aimed at other Hezbollah leaders. Israeli forces moved into southern Lebanon this week to push Hezbollah fighters away from the border in an effort to allow thousands of displaced citizens of northern Israel return to their homes. Oil prices rose sharply after the attack as markets fear Israel will target Iranian oil infrastructure in reprisal. Iran has said it will strike oil assets in the Persian Gulf if Israel hits either its oil or its nuclear infrastructure. US President Joe Biden said Thursday that the US is discussing the possibility of an attack against Iranian oil facilities with Israel.

China stimulus: This time we’re serious

After months of piecemeal efforts at shoring up the sagging property market, China last week unveiled a series of measures designed not only to arrest the slide in home prices but also to increase consumption and bolster investor sentiment. Markets jumped on the news before closing for the Golden Week holidays, which end on Monday. Ahead of the stimulus announcements, markets were extremely bearish on Chinese equities amid slow domestic growth and falling goods prices, so part of last week’s startling gains were likely a result of short-covering. Even so, the size and scope of the stimulus has forced investors to take the actions seriously. In fact, analysts at Deutsche Bank estimate, based on currently available information, that the stimulus is the third largest in China’s history in GDP terms and on par with its COVID-19 response.

QUICK HITS

Global purchasing managers’ indices, aside from the US ISM reading, showed modest deterioration in September while the US services PMI jumped to its highest level since February 2023 led by a surge in new orders.

Amid subtarget eurozone inflation readings, European Central Bank President Christine Lagarde told European lawmakers this week that the ECB is increasingly confident that inflation will fall to its target and that this will be reflected in its next policy move. Eurozone consumer prices rose only 1.8% year over year in September while the composite purchasing managers’ index fell below 50.

After new Japanese Prime Minister Shigeru Ishiba signaled his opposition to an early rate rise by the Bank of Japan, Governor Kazuo Ueda indicated that the BOJ will move slowly to tighten policy given global economic uncertainty.

The death toll from Hurricane Helene, which made landfall on 26 September, topped 200 on Friday amid devastating flooding in the US Southeast. 

The French finance ministry is considering an 8.5% temporary extra tax on companies with more than €1 billion ($1.1 billion) in revenue and a tax on stock buybacks equal to 8% of the nominal reduction in capital, according to Le Monde. President Emmanuel Macron said he supports the temporary corporate levy.

The US Job Openings and Labor Turnover Survey showed a rise in job openings in August. The data show just over 8 million open positions, up from 7.7 million in July. However, layoffs and hiring remained low while at the same time few workers are quitting their jobs, suggesting a less dynamic labor market.

According to PwC, the average US shopper is expected to spend $1,638 this year, or 7% more than in 2023, the firm said in its annual holiday outlook. 

The Institute of Directors said Tuesday that the fear of looming tax hikes and workplace regulations expected to be brought in by the UK’s new Labour government had contributed to the drop in its monthly economic confidence index to -38, the lowest level since December 2022.

Claudia Sheinbaum was inaugurated as Mexico’s first female president on Tuesday and vowed to continue the policies of her predecessor, Andrés Manuel López Obrador.

Dockworkers on the US East and Gulf coasts suspended a brief strike on Thursday night, after agreeing on a 62% wage increase over six years. The union representing the workers extended its existing contract to mid-January to give negotiators time to work out the details. 

The Bank of Canada announced it will expand its Governing Council to seven members from six by adding an external deputy governor.

The European Union this week secured enough support from member countries to impose tariffs of up to 45% on Chinese electronic vehicles.