The Bureau of Labor Statistics on Friday released a September jobs report that sharply exceeded expectations of the pace of employment growth, shaking up financial markets and prompting economists to reevaluate their interest rate outlook.
Non-farm payrolls surged to 336,000, nearly double the predictions, and an upward revision of August's figures from 187,000 to 227,000 further boosted the strength of job growth. Beneath this impressive headline number, unemployment and wage growth figures fell slightly short of expectations.
Treasury yields shot up significantly as investors quickly recalibrated their expectations for Federal Reserve interest rates. The 30-year Treasury yields rose past 5%, hitting levels last seen in July 2007. The iShares 20+ Year Treasury ETF (NYSE: TLT), a popular exchange traded fund investing in long-dated Treasury notes, fell by 1.2% on Friday, extending its year-to-date decline to 17%.
This adjustment has increased the likelihood of another interest rate hike before the year's end and accelerated expectations of rate hikes well into 2024.
Economists React To NFPs Report
Alex McGrath, chief investment officer for NorthEnd Private Wealth remarked that the BLS report was four times stronger than the ADP reported published on Wednesday. He pointed out that elevated yields could pose a significant challenge to equities for the remainder of the year. With the risk-free return rate at its highest point in two decades, finding growth in equities might prove challenging in the fourth quarter.
Quincy Krosby, chief global strategist for LPL Financial emphasized the report's affirmation of the labor market's resilience, which could boost consumer spending, especially with lower gasoline prices. The expert also noted that rising rates, driven by a strong economic foundation, should alleviate concerns of stagflation. Krosby suggested that the Federal Reserve now has an added reason to continue raising rates or maintaining its "higher for longer" approach.
Charlie Ripley, senior investment strategist for Allianz Investment Management believed that the report, with its robust job numbers and positive revisions, could change the narrative and suggest that the Fed's work is not yet complete. He highlighted the challenges the Fed may face as it fine-tunes its monetary policy in light of the strong employment data.
Mohammed El-Erian, president of Queens' College, Cambridge, and chief economic adviser at Allianz, described the positive jobs report as a mixed blessing for the economy and financial markets. While it signifies strength in job creation, it may trigger a sell-off in both stocks and bonds, especially as labor force participation remained stagnant. El-Erian wrote on social media platform X that this development could put an interest rate hike back on the table for the Fed in the eyes of the market.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, expressed surprise at the report's considerable deviation from expectations, which is going to put additional pressure on the Fed to raise rates at their upcoming meeting.
He noted that despite the rapid rise in interest rates over the past year and a half, the job market remains hot, and consumers resilient.
However, he cautioned that this could lead to worries in both the bond and stock markets about further rate hikes and their potential impact on consumers and corporate profits.