What The Fed Will Do After October Jobs Report Weakened

In pre-market trading, the S&P 500 (SP500) and Nasdaq (COMP.IND) jumped by around 30 – 40 basis points within seconds, after the Bureau of Labor Statistics reported October 2023 nonfarm payroll (“NFP”) data. Job growth slowed more than expected and unemployment ticked up. Markets want this negative development. After inflation data (from the CPI report) and personal consumption expenditures price index, the Fed depends on the NFP report for its interest rate policy decision.

Earlier this week, the Fed announced no change to interest rates. Instead of emphasizing higher (rates) for longer (“HFL”) to add another 25 bps, Fed Chair Powell backed down the hawkish tone.

How does this NFP report affect the Fed’s December decision?

August and September 2023 Revisions

Just as astute investors should read the small font and footnotes in company filings, they should read the NFP revisions. The BLS lowered its total nonfarm payroll employment for August down by 62,000. The figure falls from 227,000 to 165,000. The BLS revised down the September jobs down by 39,000, from +336,000 to +297,000.

Recall that in the September jobs report, the BLS revised total nonfarm payroll employment up by a significant +79,000. The original 157,000 figure increased to +236,000. The August NFP employment increased by 40,000, or from 187,000 to 227,000.

In response to the figures, the stock indices rose in pre-market trade. At the time of writing, bond yields immediately fell. The longer-term bonds fell the most. As shown below, the 30-year treasury (US30Y) and 10-year treasury (US10Y) dropped.

Hedge fund billionaire Bill Ackman’s short cover against bonds proved perfectly timed. He cited that “there is too much risk in the world to remain short bonds at current long-term rates.” The weaker jobs report supports the Fed’s less hawkish tone.

Unemployment Rate of 3.9% in October 2023

The NFP increase of 150,000 is little changed at 3.9%. Job gains were most pronounced in health care, government, and social assistance. The highly publicized strike activity hurt the manufacturing and automotive sectors, as shown below.

Long-time readers of my monthly job report should expect me to extrapolate the increased jobs in health care and social assistance to stock selection. Time delays between job changes distort its correlation to stocks. Furthermore, investors will still need to perform due diligence on the company before buying their stock.

Hospital landlord Medical Properties Trust (MPW) bottomed at below $4.50. It increased its FY 2023 guidance in its Q3 report. In the drug sector, a sub-sector rotation out of Covid vaccine suppliers began months ago. Investors dumped Pfizer (PFE) and Moderna (MRNA) in favor of obesity drug suppliers Novo Nordisk (NVO) and Eli Lilly (LLY).

Since my last jobs report, the selloff in automotive manufacturers accelerated. Ford (F) announced a tentative contract to end the strike before posting terrible Q3/2023 results. The firm blamed the suspension of the 2023 guidance on the pending ratification of its agreement with the UAW. The generous 25% general wage increase over the four-year contract sets a precedent. More workers in other sectors will demand a wage increase, causing sticky or permanent inflation.

Before that, United Parcel Service (UPS) negotiated wage hikes that hurt its results. It also missed revenue expectations. This will pressure its operating margins. The stock grade for UPS fell on three metrics:

Job Increases

Jobs increased in construction, up by 23,000, although in line with the average monthly gain of 18,000. In addition, jobs grew in specialty trade contractors (+14,000) and construction of buildings (+6,000).

The hot activity contradicts the Fed’s view that its monetary policy has an impact on the housing market. Readers may not have stocks to buy in the homebuilding sector. Lennar (LEN), D.R. Horton (DHI), and NVR (NVR) are up YTD:

Find the quant ratings on the 24 homebuilding stocks here.

Readers may look at the quant rating of these 175 real estate stocks for further investment ideas.

Job Decreases

The decline in manufacturing jobs due to the strike activity is masking another troubling trend. Consumers are shunning electric vehicles as they delay the purchase of high-priced nice-to-have goods. BorgWarner (BWA) management is not optimistic about the outlook for EVs. Conversely, Magna International (MGA) beat expectations when it posted a 15.1% Y/Y increase in revenue in the third quarter. Magna also updated its FY2023 outlook, reassuring nervous investors.

Sectors with Little Change

The BLS highlighted sectors with little job changes. They include leisure and hospitality (+19,000), professional and business services (+15,000), and employment in temporary help services (+7,000).

Your Takeaway

The market sentiment reversed abruptly well before the jobs report. Treasury bond yields are backing down from the psychologically important 5.0% range. In the three months previously, yields looked ready to rise above 5.5% to 6%. The weak job report supports the Fed’s latest decision. However, investors should exercise caution. The worker strike hurt the job report. When they return to the job market, the next NFP report could jolt the market to the downside.

For now, expect the Fed to continue to pause its rate hike in its next policy meeting.