Weekly Market Perspectives: Slower labor market cheered by investors
Published: November 7, 2023
It was jobs week with a Federal Reserve meeting smashed in between while earnings season continues to chug along in the background. Markets continued to digest the data amid undercurrents of weakening economic figures and a Fed determined to bring inflation back to target levels, even if it means incurring below average growth or breaking a robust labor market. Jerome Powell and the Fed are watching financial conditions closely and seem to be allowing this year’s rise in long-term bond yields as a substitute for more policy tightening. Even with tighter financial conditions pushing inflation and labor momentum lower recently, the Fed has specified it needs to see sustainable progress towards long-term objectives before it reverses policy. For now, the Fed seems content with the current level, and the dovish pivot in rhetoric was universally cheered by investors. Markets rallied with the S&P 500 trading higher by +5.9%, the best weekly return since November 2022, and falling yields across the curve propelled the US Aggregate Bond Index higher by +2.0%.
The Bureau of Labor Statistics reported slower growth than expected in the US job market on Friday. The US economy added +150k jobs in October coming in below expectations of +180k. Revisions also cut 101k jobs from the prior two months, though the absolute numbers remain solid. October marks the third expectations miss in the last five months and showed the first drop in the labor participation rate – the percentage of population working or looking for work – since October 2022. Moreover, the employment/population ratio — or the share of the population that has a job — for those ages 25-54 fell to 80.6%, the lowest since February. As a result, the unemployment rate ticked higher in October to 3.9%, up from 3.8%, indicating new job seekers are not being absorbed as labor demand slows. Finally, monthly wage gains slowed to +0.2%, coming in below expectations indicating supply and demand dynamics continue to normalize. The news was resoundingly negative for job seekers and the broader economy but is a welcome development for the markets and a Federal Reserve trying to get the upper hand against inflation. Markets rallied following the report as investors marked down chances of a Federal Reserve interest rate hike in the coming months.
This Federal Reserve meeting was probably the least anticipated in a long time, and it delivered. Even the meeting-to-meeting (Sept 20 vs Nov 1) comparison of the press release was nearly identical. The Fed held interest rates at the highest level in 22 years for the second consecutive meeting and hinted they may be finished with the most aggressive tightening cycle in four decades. Powell left the door open for another rate hike prior to year-end but indicated that the bar for another hike (or a rate cut) was very high, at least for now. Powell stated at the press conference, “Slowing down is giving us a better sense of how much more we need to do, if we need to do more.” There are several reports on prices, labor, and economic activity between this announcement and the next meeting on December 13th that may change this current stance; however, it is widely expected that the Fed has hiked for the last time this cycle.
A quick update on earnings season… Several large reports came in better than expected, but it is forward guidance that is most concerning for investors. Take Apple for example which reported on Thursday. The company beat expectations on earnings and revenue but provided weak guidance for the holiday quarter pulling the stock down more than -2%. Many company executives are predicting weakness on the horizon and have guided lower accordingly. The Bloomberg data in the chart below compares corporate forecasts with the Wall Street consensus and shows company quarterly guidance has only been lower one other time since 2019. It may be easy for Wall Street to dismiss C-Suite executives as too conservative, but one conclusion from this earnings season may be that if business leaders start to expect a recession, it becomes a self-fulfilling prediction. If business spending slows in reaction to a weaker consumer, economic activity will slow, and thus, enter recession territory. Monetary policy tightening and the constant bombardment of recessionary headlines have taken a toll on sentiment, and it is beginning show in guidance as well as planned business expenditures. Only 25% of S&P 500 companies provide quarterly guidance and just over 50% offer guidance on an annual basis so there is a significant gap for the entire index, but the data point is still telling.