Tightening Labor Market Makes NFP Report Major Event

Take a moment to think about it, but can you recall a Non-Farm Payrolls report this year that has produced an unusually volatile reaction in the stock market? I can’t. I remember most as non-events with most investors focused on the Average Hourly Earnings component of the report and little on the headline number.
James Hyerczyk
Stock Market Risk Ahead
Stock Market Risk Ahead

If the price action in the stock market the past two days is any indication then tomorrow should be an extremely volatile session. This is because all of a sudden, investors are paying attention to jobs data. We saw it early Wednesday with the market’s response to the better-than-expected ADP report and we saw it later in the session when Fed Chair Powell indirectly cited the labor market as a reason why we could see more rate hikes on the horizon.

Take a moment to think about it, but can you recall a Non-Farm Payrolls report this year that has produced an unusually volatile reaction in the stock market? I can’t. I remember most as non-events with most investors focused on the Average Hourly Earnings component of the report and little on the headline number.

However, this time conditions are different so brace yourself for a volatile reaction to the headline number and average hourly earnings. The reason I expect to see such a move is because the labor market looks to have tightened considerably, and recent commentary by the FOMC suggests that this has not gone unnoticed.

I have always said that if the Fed notices it then you should notice it. If you don’t believe that then re-read the headlines about the tariffs and trade disputes the past six-months then look at the Fed’s commentary on the same topic then look at the stock market’s performance. If the Fed says labor is tightening then you should pay more attention to the numbers.

Earlier today, initial jobless claims fell to 207,000, a 49-year low. Remember not long ago when we were saying that interest rates were at a 49-year low. Things don’t go down forever.

Traders expect Friday’s U.S. Non-Farm Payrolls report’s headline number to show U.S. employers added 185,000 jobs in September following a 201,000 rise a month earlier.

The unemployment rate is forecast to edge down 0.1 percentage points from the 3.9% reported in August.

Average Hourly Earnings are expected to rise 0.3%, down from 0.4%.

Treasury Yields and Stock Market Performance

While some may focus on rising interest rates and their impact on corporate earnings and therefore, stock market performance, others are looking at rising U.S. Treasury yields and seeing an opportunity to finally ditch some of the volatility in the stock market and lock in government guaranteed performance.

I tend to lean towards the investor mentality. Stocks are down again on Thursday because 10-year U.S. Treasury yields have hit a 7-year high, breaking above 3.2 percent. This level is attractive so some investors pull a little money out of the stock market. With each sustainable rise in Treasury yields, investors are likely to pull more money out of stocks and move it into debt instruments. This will go on until interest rates level off.

We all know that investors have been throwing money into the stock market because interest rates have been near historically low levels. Money seeks the highest return and the stock market has offered the highest return. This has caused investor allocations between stocks and bonds to become distorted or weighted too much towards equities. If interest rates continue to rise then these investors are likely to rebalance in order to bring their allocations back to more reasonable percentages. This would be another reason to expect further weakness in the stock market.

Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.