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NFP Recap: Impressive Growth Continues, but Is the “Breakout” in Wages Legit?

Much like we saw with the Bank of England meeting getting overshadowed by Brexit developments earlier this week, traditional market-moving economic releases are taking a back seat to geopolitical developments in the US as well.

Today’s Non-Farm Payroll report, usually the marquee economic release of every month, has been partially overshadowed by news that President Trump asked his cabinet to draw up a possible trade deal with China. The prospect of a truce in the escalating trade war has taken some of the sheen off today’s labor market data.

Nonetheless, today’s US jobs report offered some strong news for US economic data watchers. On a headline basis, the US economy created 250k jobs in October, well above the 190k expected by economists. Despite fears of hurricane-induced distortions to last month’s report, there were 0 net revisions to the previous two months’ reports.

Meanwhile, the unemployment rate held steady at 3.7%, its lowest level in nearly 50 years. Making this figure more impressive, we saw the Labor Force Participation Rate tick up 0.2% to 62.9%, signaling that the labor market was able to draw in previously discouraged workers and comfortably assimilate them into new jobs.

The figure that will draw all the headlines on the evening news is the change in average hourly earnings, which rose 3.1% year-over-year, its highest clip since the Great Financial Crisis in 2009. That said, we encourage readers to tap the brakes on the “breakout” in wages, as this month’s reading benefitted from a favorable comparison to the reading twelve months ago, meaning that it may be a one-off outlier. If next month’s wage growth figure holds above 3.0%, it would solidify the impression that wage growth is sustainably accelerating.

If I may editorialize a bit here, it’s truly astounding to see the US labor market continue to create jobs at this clip, and while there’s still evidence of some “slack,” we may start to see fewer jobs created, but more acceleration in wages (i.e. “full employment” jobs reports) as we flip the calendars into 2019…though many have made similar calls over the past half-decade!

Notwithstanding the swoon in global equity markets over the last month, traders continue to price in another interest rate hike from the Federal Reserve in December. According to the CME’s FedWatch tool, Fed Funds futures traders were discounting about an 80% chance of a rate increase at the start of October; in the wake of today’s release, that figure sits at 77%. In other words, a December rate hike isn’t quite fully priced in to the market, but there’s relatively little blood to squeeze from that stone. Assuming no surprises, traders will soon start to turn their attention to Fed policy in 2019.

Market Reaction

The battered buck caught a bid in the wake of the jobs report, with the US dollar rising by 20-30 pips against most of its major rivals. Meanwhile, US stock index futures ticked lower on the release, though the Dow Jones Industrial Average and S&P 500 are both pointing toward higher opens; the NASDAQ is set to open near flat after disappointing earnings from Apple after the close yesterday. Finally, the yield on the benchmark 10-year Treasury bond is ticking up 4bps to 3.18% on the day.


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