Oil and the dollar strengthen on jobs data, Nasdaq dips

Jobs data provided no easy answers to the state of the economy, and equity markets fell back after initial enthusiasm – notably Nasdaq. Job numbers were ahead of expectations, the unemployment rate rose, and average earnings – a key inflation driver – grew by 4.3% annually. Short-dated bond yields rose and market predictions for the Fed Funds rate pointed to no rate cuts anticipated this year. Oil prices hit 2023 highs on reports that Russia will extend its production cuts through October, and expectations that Saudi Arabia will follow suit.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Bond yields and the dollar move higher

Treasury yields and then dollar moved higher after the jobs data and comments by Cleveland Federal Reserve President Letta Mester. Her speech had a decidedly hawkish tone, suggesting that while this morning's jobs report showed progress, it may still not be enough to tame inflation to the 2% mandate. Average earnings growing at 4.3% annually is too hot compared to a 2% inflation target.

Future Fed rate decisions “will require close monitoring of economic, banking, and financial market developments and using all of that economic reconnaissance to determine whether the economy is evolving in line with the outlook or not,” Mester said. This echoes Fed Governor Powell’s speech at the Jackson Hole Economic Symposium last week: "We expect this labor market rebalancing to continue … Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response."

Jobs data stronger than expected

This morning’s Non Farm Payroll gave some contradictory messages with respect to the inflation outlook: job numbers at 187,000 were ahead of expectations (bad), annual average earnings rose 4.3 % (bad), and the unemployment rate at 3.8% rose (good), but explicable.

An increase supply of workers into the workforce is one way to ease wage inflation: the participation rate increased, providing an explanation for the rising unemployment rate when these people didn’t find jobs. The average workweek also stretched a bit longer to 34.4 hours in August, up from 34.3 hours previously.

There’s something for everyone in this report. The question is, will it be enough to persuade the Fed to hold on interest rates? Fed fund futures trading reduced the odds of a November rate hike to 35% this morning, down from 41% yesterday and down from more than 60% a few days ago. So maybe we don’t see another rate hike, but also no early rate cut.

• The economy created 187,000 jobs in August, ahead of an expected 170,000, but July data was revised down to 157,000 from 187,000 first reported
• The unemployment rate jumped to 3.8% in August, when it was expected to be unchanged, the result of more people returning to the workforce but not finding jobs (the labor participation rate rose to 62.8%, up from 62.6% last month)
• Average hourly earnings were up 4.3% year-on-year in August, slightly below analyst expectations of 4.4% growth
• Average hourly earnings rose 0.2% month-on-month in August, down from 0.4% growth in July
• The private sector added 179,000 jobs in August, up from a downwardly revised 155,000 in July
• Even manufacturing, in the doldrums, added 16,000 jobs in August, after losing 4,000 last month

TODAY’S MAJOR MARKETS

Equity market’s mixed, Nasdaq relative loser

• Equity markets were mixed after the jobs report, with the Nasdaq down 0.2%, the S&P 500 was unchanged, and the and Russell 2000 up 1.1%
• Global markets were generally positive overnight, with the FTSE 100 and Nikkei 225 both up 0.3%, while the DAX was down 0.9%
• The VIX, Wall Street’s fear index, fell to 13.9

Bonds yields and dollar rise

• Bond yields rose, with 2- and 10-year bonds up to 4.89% and 4.19% respectively
• The dollar index rose 0.6% to 104.2, showing signs of a bullish breakout
• Versus the dollar, the Euro and Yen were off 0.5%, while Sterling was off 0.7%

Oil and ag commodities rally

• Crude oil prices rallied 1.8%, to $85.1 per barrel on hoped for OPEC+ production cuts
• Gold was unchanged at $1,965 per ounce, while Silver fell 08% to $24.6 per ounce
• Grain and oilseed markets are also higher as we start the new month of trade, while heading into a three-day holiday weekend when Black Sea risks will remain a threat

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com