A hot jobs report that would normally be interpreted as good economic news caused the markets to shudder a bit on Friday because it raises the prospect that the Federal Reserve will aim to keep interest rates higher for longer.
The economy added another 336,000 jobs in September, the Bureau of Labor Statistics reported, a number that was well above the expectations of forecasters. The Friday morning report also revised up the employment gains in July and August by a combined 119,000.
EMPLOYMENT GROWTH CRUSHES EXPECTATIONS WITH 336,000 JOBS ADDED IN SEPTEMBER
The numbers show that job growth is accelerating rather than decelerating. That complicates things for the Fed because the central bank has been raising its interest rate target in order to drive down inflation, and a stronger labor market can put upward pressure on inflation, meaning that rates might have to stay higher for longer or even go up even more.
Most economists had expected that the labor market would have taken a whack by now — the Fed has been hiking for over a year. Markets don’t like higher interest rates, so the technically positive report is making the country’s economic outlook much more uncertain.
“One of the big oxymorons on Wall Street is whether Good News is good news or Good News is bad news? In this case good (jobs) news is bad news for the market,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a statement.
The bond markets quickly responded to the prospect of a higher interest rate environment.
Benchmark 10-year Treasury yields briefly touched 4.887% on Friday, while 30-year yields reached as high as 5.05%, the highest they have been since just before the start of the Great Recession in 2007.
The stock market also reacted to the fresh data, with futures on all the major indices plunging in pre-market trading. As the morning ticked by, though, those losses were pared back, and indices turned positive midday as investors tried to shake off rising Treasury yields.
Notably, this is the last employment report before the Federal Open Market Committee meets at the end of the month to decide whether to hold its interest rate target steady at 5.25% to 5.50% or raise it to 5.50% to 5.75%.
“Today's report drove yet another increase in Treasury yields and fanned the flames that the FOMC may hike the federal funds rate one more time at one of its two remaining meetings of the year,” Wells Fargo economists said in a note on Friday. “Another rate hike before the end of the year is a possibility, but for now our base case remains that the last rate hike of the tightening cycle occurred in July.”
Investors see about a 71% probability that the Fed will not hike rates again before the end of the year, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
But the strong jobs report and a hot report on job openings have changed those odds a bit. A week ago, odds of a pause were pegged at nearly 82%.
Looking further down the line, there are some 40% implied odds that there will be at least one more rate revision before the close of 2023.
The job openings report was released on Tuesday and surprisingly showed an upside. The number of U.S. job openings rose to 9.61 million in August, reversing the trend after three straight months of declines.
“Any wonder why the Fed expects to raise interest rates again? With 1.5 job openings for every unemployed worker, there is little evidence of substantial easing in labor market demand, a risk to getting inflation lower," said Greg McBride, chief financial analyst at Bankrate.
Inflation has proven stubborn in recent months.
Inflation was clocking in at 3.7% in August, according to the consumer price index. That is up from a low of 3% notched in June. On the Fed’s preferred gauge, the personal consumption expenditures price index, prices rose 3.5% for the year ending in August.
While far lower than the historic inflation felt in 2022, the readings are still above the Fed’s preferred 2% range.
The Fed will be closely watching for September’s CPI numbers, which will be released next Thursday and for the PCE data, which will be released just four days before central bank officials huddle in Washington, D.C., to decide their next course of action on interest rates.
But the jobs news this week doesn’t just affect the Fed and investors. The hotter employment and job openings data also have a direct negative effect on consumers. Higher rates make buying a home or taking on credit card debt more expensive.
Mortgage rates have soared to highs not seen in decades. As of Friday, the average rate on a 30-year fixed-rate mortgage has soared to 7.84%, according to Mortgage News Daily. That is more than a 0.6 percentage point increase in just about the past month alone. The last time mortgage rates were this high was in 2000.
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During a speech at the White House on Friday, President Joe Biden vaunted the job growth while avoiding touching on the negative aspects of the strong labor market and how it will affect the Fed’s decision-making.
“The unemployment rate has stayed below 4% for 20 months in a row, the longest stretch in 50 years,” Biden said. “We have the highest share of working-age Americans in the workforce in 20 years. It’s no accident. It’s Bidenomics. We’re growing the economy from the middle out and the bottom up and not the top down.”