Surprisingly Strong US Jobs Report Bolsters Soft Landing Delusions

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Alex Harring and Lisa Kalai Han of CNBC report Dow jumps 300 points for record close as September’s big jobs report spurs rally:

Stocks advanced on Friday after an expectation-defying jobs report gave investors confidence around the health of the economy.

The S&P 500 rose 0.9% to 5,751.07, while the Nasdaq Composite jumped 1.22% to 18,137.85. The Dow Jones Industrial Average added 341.16 points, or 0.81%, to notch an all-time closing high of 42,352.75.

Stocks rallied after data showed nonfarm payrolls grew by 254,000 jobs in September, far outpacing the forecasted gain of 150,000 from economists polled by Dow Jones. The unemployment rate ticked down to 4.1% despite expectations for it to hold steady at 4.2%.

“After a summer of weak labor data readings, this is a reassuring reading that the U.S. economy remains resilient, supported by a healthy labor market,” said Michelle Cluver, head of ETF model portfolios at Global X. “We remain in an environment where good economic news is good news for the equity market as it increases the potential for a soft landing.”

Tesla, Amazon and Netflix were among the megacap tech names climbing on Friday, which can help explain the Nasdaq’s outperformance. Financials were the top sector in the S&P 500 during the session, surging 1.6% and closing at a record. JPMorgan Chase and Wells Fargo jumped more than 3% each.

On the other end of the spectrum, small cap stocks also rallied, with the Russell 2000 up 1.5%.

Friday’s bounce erased losses seen in recent days. Mounting geopolitical tensions in the Middle East gave way to a shaky start in October for stocks, a turn after the market posted an unusually strong first nine months of the year.

The S&P 500 finished up 0.22% on the week, while the Dow inched higher by 0.09%. The Nasdaq added 0.1% for the week, a major turnaround given the tech-heavy index came into Friday’s session down more than 1%.

Crude oil prices rose again on Friday, bringing the weekly gain to around 9%. Oil has been pushed higher as a result of intensifying conflict in the Middle East after Iran launched a missile attack on Israel.

Energy stocks have jumped this week as oil rallied, with the S&P 500 sector up 7%. That marked the group’s best week since October 2022.

What investors should expect next week: Inflation data, Fed minutes and more

The next week will bring closely watched inflation data and minutes from the Federal Reserve’s September policy meeting. A handful of major corporate earnings reports are also due.

Jeff Cox of CNBC also reports Fed close to pulling off the elusive economic soft landing in 2024 after great September jobs report:

September’s outsized payrolls boost takes the U.S. economy out of the shadows of recession and gives the Federal Reserve a fairly open glide path to a soft landing.

If that sounds like a Goldilocks scenario, it’s probably not far from it, even with the lingering inflation concerns that are straining consumers’ wallets.

A gravity-defying jobs market, at least a slowing pace of price increases and declining interest rates puts the macro picture in a pretty good place right now — a critical time from a policy and political standpoint.

“We’ve been expecting a soft landing. This just gives us more confidence that it seems to remain in place,” Beth Ann Bovino, chief economist at U.S. Bank, said after Friday’s nonfarm payrolls report. “It also increases the possibility of a no-landing as well, meaning even stronger economic data for 2025 than we currently expect.”

The jobs count certainly was better than virtually anyone figured, with companies and the government combining to boost payrolls by 254,000, blowing away the Dow Jones consensus for 150,000. It was a big step up even from August’s upwardly revised numbers and reversed a trend that started in April of decelerating job numbers and rising concern for a broader slowdown — or worse.

Beyond that, it virtually eliminated any chance that the Federal Reserve would be repeating its half percentage point interest rate cut from September anytime soon.

In fact, futures markets reversed positioning after the report, pricing in a near-certain probability of just a quarter-point move at the November Fed meeting, followed by another quarter point in December, according to the CME Group’s FedWatch gauge. Previously, markets had been looking for a half-point in December followed by the equivalent of quarter-point cuts at each of the eight Federal Open Market Committee meetings in 2025.

Not a perfect picture

No more, though, as the Fed, barring any more disappointments from the labor market, can stake a moderate pace through its easing cycle.

“If we continue to see a stronger-than-expected economy that may give the Fed reasons to slow the pace of rate cuts through 2025 with that exit rate being a little bit higher than they currently expect, all with the economy still maintaining its strength,” Bovino said. “That would be good news for both the Fed and the economy.”

To be sure, there remain some blemishes in the jobs picture.

More than 60% of the growth for September came from the usual suspects — food and drinking establishments, health care, and government — that have all been the beneficiaries of fiscal largesse that has pushed the 2024 budget deficit to the brink of $2 trillion.

There also were a few technical factors with the report, such as a low response rate from survey participants, that could cast some clouds over Friday’s sunny report and lead to downward revisions in subsequent months.

But broadly speaking, the news was very good and raised questions over just how aggressive the Fed will need to be.

Questions for the Fed

Bank of America economists, for instance, asked “Did the Fed panic?” in a client note referencing the half percentage point, or 50 basis point, cut in September, while others wondered about the wild vacillations and miscalculations among Wall Street experts. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “it is doubtful” the Fed would have cut by so much “if it had known this report would be so strong.”

“The question becomes, how does everybody keep getting it wrong?” said Kathy Jones, chief fixed income strategist at Charles Schwab. “How is it we can’t get this number right with all the information we get?”

Jones said the Fed will have a dilemma on its hand as it figures out the proper policy response. The FOMC next meets Nov. 6-7, right after the U.S. presidential election and following a five-week span during which it will get plenty more to digest.

Some commentary after the report suggested the Fed may have to raise its estimate of the “neutral” rate of interest that neither boosts nor restricts growth, an indication that benchmark interest rates will settle at a higher place than they have in the recent past.

“What does the Fed do with this? Certainly, 50 basis points is off the table for the next meeting. I don’t think there’s any case to be made there,” Jones said. “Do they pause? Do they do another 25 [basis points] because they’re still far from neutral? Do they just weigh this against other data that might not be as strong? I think they have a lot of figuring out to do.”

In the meantime, though, officials are likely to be content knowing that the economy is stable, the labor market isn’t in nearly as much trouble as had been suspected, and they have time to weigh their next move.

“We’ve witnessed a pretty remarkable economy over the past few years, despite some naysayers and lackluster consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, passions run high and every economic report or event can garner intense reaction. But the economic aggregates tell us the U.S. economy has been and is strong.”

Today's outstanding US jobs report didn't surprise me for two reasons. First, the Fed's tone this week was subdued hinting at modest rate cuts earlier this week (Powell had the data).

Second, with elections right around the corner, the "Bureau of Labor Surprises" wasn't going to disappoint once again, and the media is lapping it up:

Call me old, cynical, a "conspiracy theorist," call me whatever you want but it's clear to me the established media and government organizations do not want to see a second Trump administration.

Nothing has really changed in terms of the US economy slowing down.

Earlier this week, the Institute for Supply Management issued its September Report showing economic activity in the manufacturing sector contracted in September for the sixth consecutive month and the 22nd time in the last 23 months.

Importantly, the New Orders Index remained in contraction territory, registering 46.1 percent, 1.5 percentage points higher than the 44.6 percent recorded in August.

This is a leading economic indicator, employment is a coincident indicator.

However, it's true the The Services PMI® registered 54.9 percent in September, which is the highest reading since February 2023 and indicates sector expansion for the 49th time in 52 months.

Interestingly the Services PMI report showed the New Orders Index expanded to 59.4 percent in September, 6.4 percentage points higher than August’s figure of 53 percent, but Employment Index contracted for the first time in three months; the reading of 48.1 percent is a 2.1-percentage point decrease compared to the 50.2 percent recorded in August.

The data is a bit wonky but manufacturing activity leads the cycle and there's clearly a slowdown going on there:

And even on employment, the announcements of pending job cuts are rising sharply:

And housing market fundamentals are far from good, affordability remains at historic lows and rental properties are surging:

Nobody seems to care, good news was bought hard today, sending stocks higher and 2024 is shaping out to be very similar to 2023 in terms of stocks and FOMO:

Next week earnings season begins and it will be interesting to see if companies continue to meet or beat (lowered) expectations.

This week was a particularly strong week for energy stocks, up 7% as tensions in the Middle East sent oil prices higher.

Alright, not much more to add here, just don't be surprised if the BLS starts revising down data massively, especially in the new year.

Below, Ben Emons, FedWatch Advisors chief investment officer & founder, joins 'Fast Money' with the traders to discuss the markets post jobs report.

Next, Jeremy Siegel, Wharton School professor of finance, joins 'Closing Bell' to discuss the spate of economic data to cross the tape, what the soft landing means for stocks, and much more.

Third, Roger Altman, Evercore founder and senior chairman, joins 'Closing Bell' to discuss Altman's takeaway from Friday's market action, why the Federal Reserve cut rates by 50 bps, and the senior chairman's investing stance on equity markets.

Lastly, Leon Cooperman, Omega Family Office chairman and CEO, joins 'Squawk Box' to discuss the latest market trends, the Fed's interest rate decision, state of the economy, 2024 election, his favorite holdings, and more.

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