Tightening Labor Market Makes NFP Report Major Event

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.