U.S. equities came under pressure on Friday amid the release of the September payroll report — breaking a recent pattern of always rising when jobs numbers are released. The thinking was, if the report was weak, the Federal Reserve was likely to hold off on interest rate hikes. If it was strong, well, that reflects a strengthening economy.
Only this time, a weak result was combined with hawkish commentary from the Fed that it was “good enough” to keep a rate hike before the end of the year on track. And that was exactly the opposite of what traders wanted to hear.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.3% and the Russell 2000 lost 0.8%. Treasury bonds were mostly stronger, the dollar was down, gold gained 0.45%, and oil was lower with a loss of 1.6%.
Healthcare stocks led the way with a 0.1% gain while materials were the laggards, down 1.8%. Khaki slinger Gap Inc (NYSE:GPS) gained 15.2% on better-than-expected comp-store sales at its Old Navy brand, better margins, and an analyst upgrade from Deutsche Bank.
Turning to the jobs report: Nonfarm payrolls increased 156,000 for September, below the 172,000 gain expected. The unemployment rate pushed up to 5% from 4.9% in August. The participation rate increased slightly. And average hourly earnings growth accelerated slightly, to a year-over-year increase of 2.6% from 2.4% previously.
Normally, this result would’ve justified lowering expectations of a Fed rate hike in November and December (as a report from Fed whisperer Jon Hilsenrath in The Wall Street Journal seemed to indicate). Yet from the Fed’s own mouth, rate hikes remain on schedule.
Fed vice-chair Stanley Fischer called the number near “goldilocks” in that it was consistent with steady job gains without the risk of overheating. Cleveland Fed president Mester and Kansas City Fed president George both viewed the release positively as well.
Economists at Evercore ISI noted the report was a sign of ongoing strength in the labor market and that rising wages should placate concerns about a potential slowdown in consumer spending heading into the holiday shopping season. As things stand, the futures market assigns 70% odds of a December rate hike.
While stocks continue to trade calmly, with the Dow holding above the 18,000 level, tensions are just below the surface. Breath, or the percentage of stocks in uptrends, continues to deteriorate. With the Q3 earnings season about to begin, the corporate profits recession is showing no signs of ending.
Economic growth estimates for the third quarter were marked down to just 2.1% by the Atlanta Fed vs. the high estimate of 3.8% in early August.
And overnight, there was a nasty “flash crash” in the currency market as the British pound was, um, “pounded” lower as a result of re-emerging “Brexit” fears.
Losses were severe at mid-day, with both stocks and Treasury bonds getting hit hard in a repeat of “risk parity” concerns from a few weeks ago — where both stocks and bonds drop in unison, undermining the benefit of diversification. That benefited the ProShares UltraShort Treasury Bond (TBT) recommended to Edge subscribers.
Investors, stay cautious.