Friday's jobs report probably won't be the salve that stops the bleeding from the 10-year Treasury yield's surge to a 16-year high. Wall Street economists expect a solid report, with 160,000 new jobs, including 150,000 in the private sector. The unemployment rate is seen dipping to 3.7% as wage growth holds steady at 4.3%.
Those aren't the kind of numbers that will convince the Federal Reserve to let down its guard against a potential reacceleration of inflation and economic growth. Plus, if those projections are wrong, there's pretty good reason to think that the jobs data will come in even stronger than expected.
That balance of risks has had investors on edge this week. The S&P 500 sold off hard on Tuesday, closing at a four-month low as the 10-year Treasury yield surged 12 basis points to 4.8%.
Treasury yields eased and stocks bounced moderately on Wednesday after payroll processor ADP's estimate of private-sector job growth in September was surprisingly soft. A drop in oil prices also helped move markets. But the positive tone evaporated by Thursday morning as the latest data on new jobless claims came in lower than expected. Plus, the $58.3-billion trade deficit for August undercut forecasts, which may lead to upward revisions to Q3 GDP growth that economists already saw growing 4%-5%.
Still, the jobs report is shaping up as the week's main event.
ADP Employment Report
ADP's monthly estimate of private-sector hiring, which was released Wednesday morning, showed a big deceleration in job growth. ADP reported a net gain of 89,000 jobs in September, down from 180,000 in August. That was the weakest gain since January 2021.
That's a hopeful sign, but not one that investors should put a lot of faith in. Just look at the recent trend. In the three months through August, ADP reported a net gain of 947,000 private-sector jobs, while official Bureau of Labor Statistics data from the Labor Department showed a gain of just 420,000 jobs.
After the soft September print, ADP shows 581,000 jobs over the past three months, or an average monthly gain of 193,667 jobs. That's still well above the recent 140,000-per-month trend in official BLS data.
The bottom line is that there's no reason to expect BLS data to match up with ADP data.
Why A Soft Jobs Report Isn't A Great Bet
The U.S. economy had a head of steam in the third quarter amid strong consumer spending. New claims for jobless benefits fell to a four-week average of 217,250 in the four weeks through Sept. 16, leading up to the midmonth employer survey.
That was the lowest level for initial claims since February, when the economy added 193,000 private-sector jobs. Fewer layoffs don't assure a good jobs report, if hiring slows enough. But the limited available data suggests that hiring probably held up OK.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote that the National Federation of Independent Business survey's hiring intentions index is consistent with a 175,000 increase in private payrolls.
Homebase, payroll processor for small businesses, wrote in a Tuesday report that hospitality and entertainment businesses saw a smaller seasonal decline in September than in previous years.
There's also potential for a partial rebound in trucking employment after the bankruptcy of Yellow slashed August payroll gains by 30,000. Other trucking firms picked up some of those drivers, though how many is unclear.
Government employment also might surprise on the upside, Shepherdson says. He predicts a 75,000 government employment gain as the summer softening in state and local education employment reverses.
Wage Growth, Unemployment Rate Could Surprise
Jonathan Pingle, chief U.S. economist at UBS, predicts a stronger-than-expected 0.4% rise in average hourly wages. The August employer survey came early in the month, meaning an extra week of wage gains could be reflected in the September report.
A new UPS contract that took effect in late August, providing a $2.75-an-hour pay hike for 340,000 workers, could contribute to a firm reading.
Lastly, Pingle sees downside risk to the unemployment rate. He's forecasting a dip to 3.7% from 3.8%, but said it could go lower. That's because August's jump in the unemployment rate to 3.8% from 3.5% likely may have been overstated due to seasonal adjustment quirks.
Pingle notes that teenagers accounted for a disproportionate share of the increase in labor force participation in the August jobs report. The same kind of thing happened last summer: The jobless rate rose from 3.5% to 3.7% in August, only to fall back to 3.5% in September.
Still, The Job Market Is Getting Weaker
The September jobs report probably won't prove it, but there is plenty of evidence that the labor market is softening.
Hiring of temp workers, which has fallen for seven straight months, is seen as a leading indicator of labor demand. In the past three months alone, temp agencies have shed 79,000 jobs.
In a strong labor market, hiring is usually broad-based. But over the past three months, 91% of the job gains have come in health care, social services, and the leisure and hospitality sector.
Further, fewer employees are quitting their job, a sign that it's getting harder to find better-paying work. In August, the quits rate for private-sector employers held at 2.6%, having fallen from 3.1% a year ago. Quits are now in line with their pre-pandemic level.
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10-Year Treasury Yield
The big move higher for the 10-year Treasury yield early this week came despite last Friday's largely benign inflation report, which continued the recent disinflationary trend. The Fed's key measure of core inflation rose just 0.1% in August, the smallest monthly gain since late 2020.
On Friday, the 10-year yield had fallen as low 4.5% on tame inflation data, before bouncing to 4.57% to end the week.
After hitting 4.8% on Tuesday, the 10-year Treasury bond yield retreated to 4.73% on Wednesday, ceding some of Tuesday's big gains.
Despite Thursday's strong economic news — including a further drop in the four-week average of jobless claims to 208,750 — the 10-year Treasury yield eased to 4.71% as the S&P 500 headed lower.
While Fed Chair Jerome Powell has said the central bank will need to see six months of tame data to gain confidence in the current trend, we're getting pretty close. The six-month annualized core PCE inflation rate eased to 2.9% in August from 3.4% in July.
So if inflation is falling, why have the 10-year Treasury yield and other government bond yields been moving higher? The reason is that real interest rates, which subtract inflation, are rising.
The market seems to be struggling to digest a ton of supply. Treasury borrowing has surged amid growing deficits, even as the Fed's quantitative tightening program unloads up to $95 billion per month in Treasuries and government-backed mortgage securities.
The other reason real interest rates have surged is that the Fed thinks it will take higher real interest rates, at least temporarily, to wrestle inflation back to 2%.
Still, the Fed could be wrong. Consumers and small businesses might succumb to high interest rates before the Fed expects. High interest rates, high gas prices and renewed student loan payments are all hitting consumers at the same time. The Fed's projections are based on what was happening in the economy in June and July, before those recent stresses escalated.
S&P 500
The S&P 500 slipped 0.5% in Thursday afternoon stock market action, giving back much of Wednesday's bounce. On Tuesday, the S&P 500 slid 1.4% to the lowest level since June 1, after an unexpected rise in job openings spiked Treasury yields.
The S&P 500 has now fallen about 8% from its closing high on July 31, which was the peak of a massive 28% rally from the Oct. 12 bear-market low.
The market likely needs to see clear evidence that the economy is softening before it can mount a significant rally.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
About half the recent drawdown has come since Sept. 20, when The Big Picture warned IBD readers that a correction was at hand and it was time to step to the sidelines.
