Jobs Number Sends Stocks Lower And Rates Higher

Key Takeaways

• Stronger Than Expected Headline Jobs Number
• Interest Rate Climbing
• Oil Pullback

Stocks bounced around on Thursday before finally settling little changed from Wednesday as interest rates fell for the second day in a row. Both the S&P 500 and Nasdaq Composite fell just 0.1%. But that could all change today following the release of the latest jobs report.

According to Bloomberg, economists had expected 163K new jobs and an unemployment rate of 3.7%. According to the CME, there was a 79% probability the Fed would leave rates alone when they next meet in November. There was a 64% chance December would also see rates left unchanged. However, the September jobs report came in mixed. While new jobs were much stronger at 336K, the unemployment rate came in slightly higher at 3.8%. Following the report, expectations for a rate increase ticked up slightly for both November and December. One interesting aspect of the report is prior month revisions. Until this report, every report this year has seen a downward revision, which was the first time in the history of the report that happened. This month; however, saw a revision higher to both July and August.

The report immediately sent stocks and bonds sharply lower. However, there are some pieces buried in this report worth mentioning. First, the labor force participation rate remained unchanged. Average hourly earnings came in slightly lower than forecast. Leisure and Hospitality led the way in terms of new jobs, followed by government. Keep in mind, the government number is likely boosted by teachers returning to work and we could see government jobs turn into a casualty if we have a shutdown next month. Therefore, while the headline number will certainly attract attention, I do think there are some subtle nuances suggesting the report isn’t quite as hot as the top number suggests.

While the Fed is certainly watching jobs data, they are also keeping an eye on commodity prices as well. As I’ve mentioned a number of times, the one commodity that can make or break inflation is oil and after a strong run that began early last summer, prices have since pulled back significantly. In the last week alone, prices for crude oil are down 14%, having settled Thursday at $82.31/barrel. That has prices at the pump down as well with the average price for a gallon of gas at $3.75 according to AAA, down from $3.83 just last week.

With the jobs data now in the rear view mirror, investors have a couple new things on their radar. First up, earnings season will kick off next week. Profits for the third quarter are expected to be down 0.3% year-over-year, according to Bloomberg. However, a recovery is expected in Q4 as profits are forecast to rise year-over-year, with communications and utilities expected to lead the way. Personally, I believe the strength of the U.S. dollar is going to prove a headwind for earnings. Therefore, forward looking guidance in the upcoming earnings cycle may take on added importance.

At nearly the same time, markets will have to contend with the possibility of a government shutdown next month. The short-term bill passed last weekend only keeps the government open until next month. With no Speaker in the House of Representatives, it makes the situation all the more dire. Without a Speaker, no legislation can be brought to the floor. As a result, the longer it takes to get a new Speaker elected, the less time the House will have to vote on a proposed spending bill.

Some other macro news worth mentioning is the trade deficit, which fell to a nearly three-year low. Often times, we see the deficit widen when the dollar gains strength. Foreign products become less expensive and thus more affordable to import, while domestic goods become more expensive overseas. What I find interesting about the narrowing of the deficit is that it could mean consumers are pulling back on spending and that makes this worth watching as the holiday season approaches.

There are a few individual stocks making news this morning. General Motors
GM
is facing the recall of a potentially dangerous air bag issue and may need to recall at least 20 million cars. Amazon
AMZN
is making a move in grocery shopping. Prime subscribers will get free delivery on orders over $100. I see this as a market share grab and will be curious as to how companies such as Kroger
KR
, Target and Walmart
WMT
respond. Tesla
TSLA
is again cutting prices. The company announced they were reducing the costs on both the Model 3 and Model Y by around $2000. Finally, Exxon Mobil announced they will acquire Pioneer Natural Resources
PXD
. Shares of Pioneer are trading higher in premarket by almost 10%.

Finally, I want to come back to bonds and interest rates. For over a decade now, interest rates have not really factored into investor decisions. However, given the rise in rates this year, we’ve all become bond traders as the stock market and bonds are moving in tandem. And if you’re under the age of 45 or so, you’ve never seen a market where interest rates are rising. Therefore, this is a bit of a new experience. We’re going to offer investors some guidance on the relationship between bonds, interest rates and the stock market on tastylive.com, beginning on Monday. As always, I would stick with your investing plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.