Stocks stumble after mixed jobs and wages report

Having hit new highs yesterday, investors were in no mood to chase share prices higher after today’s jobs report.

“The non-farm number itself was as ugly as they come. For the first time in seven years the reading came in negative, at -33k against the 82k forecast and the (upwards revised) 169k seen in August. Yet while the figure was far worse than expected, it actually wasn’t that surprising given it covered a period impacted by Hurricanes Irma and Harvey,” explained Connor Campbell at Spreadex.

David Lamb, head of dealing at FEXCO Corporate Payments, said “despite the shock of the hurricane-affected headline number, this jobs report was no blowout”.

Referring to foreign exchange markets, he added: “Markets quickly looked through the surprise fall in job creation to the fundamentals – which by comparison appear little short of stellar.

“With the US unemployment rate now at its lowest level since 2001 and wage growth spiking towards the magic 3% figure, America’s labour market is working well – even if the wages figure is being flattered by a surge in high-paying hurricane clear-up work.

“Nevertheless, Janet Yellen regards wage growth of 3% or above as a healthy level for the US economy. With the average American’s paycheck now rising within touching distance of that rate, on this evidence there is little to stop the Fed pressing ahead with one more rate rise this year,” Lamb predicted.

Open

As economists scratched their heads over the September jobs data, leading stocks opened off their all-time highs.

The Dow Jones average was down 22 at 22,754 and the S&P 500 was 4 points lower at 2,547.

Non-agricultural establishments shed 33k jobs in September, well below the 80k increase expected by the market,

“The Household Survey told a different story; its measure of employment increased by 906k – one of the largest monthly gains in history,” noted German bank Berenberg, as the unemployment rate dipped 0.2 percentage points to 4.2%, its lowest since February 2001.

“Looking past the short-term hurricane disruptions, the US economy is in good shape, data have surprised to the upside recently and confidence is soaring. Moreover, this employment report reflects improved confidence in labor market conditions from households and a nascent pick up in wages,” Berenberg stated, adding that it still expects the Federal Reserve will increase interest rates in December.

On the corporate front, Kadmon Holdings Inc (NYSE:KDMN) was wanted, up 1.8% at US3.979, after the Food and Drug Administration granted orphan drug designation to KD025, Kadmon’s treatment for chronic graft-versus-host disease.

Orphan designation effectively fast-tracks the passage of a drug through the regulatory process.

Market Preview

In a jobs reported distorted by hurricanes Harvey and Irma, non-farm payrolls for September still sprang a surprise with a shrinking of the workforce.

While just about every economust added a caveat that the jobs number would be hard to predict, the decline of 33,000 was still some way off the number-crunchers’ best guess of an addition of 82,000.

The decline was the first seen in seven years; on the plus side, Austs payrolls increase was adjusted upward to 169,000 from 156,000 jobs..

Of more interest, not least because it would not have been affected by the hurricanes, was the unemployment rate, which declined to 4.2% in September from 4.4% in August, hitting its lowest level since December 2000.

Month-on-month wage growth, at 0.5%, was a shade ahead of expectations of a 0.3% increase.

“A woeful headline figure for payrolls was offset this afternoon by a hawkish earnings figure for September,” said Alex Lydall, head of dealing at Foenix Partners.

“A huge miss, over 100K lower than forecast, won’t concern Yellen too much for two reasons; firstly, hurricane Irma hit during the survey week, secondly, average earnings jumped to 0.5% relieving some of the stress Inflation levels previously cited by Fed members. This uplift along with an impressively low unemployment figure of 4.2% will mean rates can seriously be considered by year-end,” suggested Lydall.

James Knightley, chief international economist at ING, said the US jobs report had thrown up some very interesting figures, “most notably the fact payrolls fell 33,000 versus expectations of an 80,000 gain”.

“However we have to take everything with a note of caution given the likelihood of heavy distortions relating to Hurricanes.

“Despite the softness in payrolls the unemployment rate fell to 4.2% from 4.4%. The other big number is the 0.5% MoM [month-on-month] jump in wages – the biggest increase since November 2008 – which takes the annual wage growth number up to 2.9%. Note that there were also some upward revisions to monthly wage rates so we may finally be seeing some of the strength in jobs feeding through into inflation pressures,” Knightley speculated.

“Payrolls will bounce back strongly given the Bureau for Labour Statistics suggests that 1.mln people were unable to get to work because of storm disruption. Moreover, labour demand indicators remain strong in other reports,” he added.

“This positive overall story on the labour market is only going to strengthen the case for higher interest rates. We already know that the growth outlook is strong – underlined by the ISM manufacturing and non-manufacturing surveys hitting 13 and 12 year highs respectively this week – and inflation is heading back towards target – next week’s headline CPI expected at 2.1% and core at 1.8%YoY,” Knightley continued.

In company news, content provider Walt Disney Co (NYSE:DIS) and cable television company Altice USA Inc have concluded their agreement on distribution.

The multi-year deal will ensure that Disney, ABC and ESPN channels will continue to be carried on Altice’s systems.

The two parties hinted earlier this week they were close to an agreement.

Disney shares were a shade lower in pre-market trading.

Omega Protein Corporation (NYSE:OME) saw its value increase by around one-third to US$21.95 after it agreed to a US$22 a share offer from Cooke Inc.

Non-farm payrolls preview

The spate of hurricanes in September has made the non-farm payrolls number for the month tricky to forecast.

So much so, Mike van Dulken, the head of research at Accendo Markets, quipped “NFP” now stands for “non-forecastable payrolls”.

”With unemployment holding around lows , the real focus will be on wages growth. If this can hold at 2.5% annually, it supports recovering consumer inflation (and stable core), merely bolstering the likelihood of a Fed rate hike in December – which markets have already priced in a 70% probability of,” he added.

The consensus forecast is for somewhere around 82,000 jobs to have been added, down from 156,000 additions in August.

Month-on-month wage growth is expected to rise from 0.1% in August to 0.3% in September.

“The variation around the expectations for today’s non-farm payrolls release is huge given the hurricane factor. Our team are looking for a print around +110k and while consensus is at +80k, the standard deviation among analysts is 40k (double what it normally is). This suggests that a payrolls surprise may have a subdued impact on markets,” suggested ING.

“While a negative surprise may be chalked down to hurricane effects, and potentially overlooked by markets, we think this may already be in the price of the USD (the Bloomberg Whisper number is +117k),” the Netherlands-based finance added.

“Naturally the focus for Fed-sensitive assets like the shorter-end of the US yield curve and the USD will be on the wage data – here our economists are in line with consensus expecting a pretty solid +0.3% MoM – but it is worth putting this ‘good’ figure into some perspective: it is a rebound after a series of inadequate monthly wage growth releases this year (bar Feb and July),” ING added.

“While the recovery will be welcome by the Fed, even the most optimistic members will want to see signs of more than just a ‘muddling through’ to be convinced of the current rate hike trajectory. Certainly the longer-end of the US yield curve, and the broader trajectory for the USD, will need to see wage inflation encroaching on 3% to be convinced that the US economy isn’t stuck in ‘lowflation’ mode.”

Story by ProactiveInvestors