Wall Street, Gold recovered on mixed NFP/BLS job report

On Thursday, Wall Street Futures and gold slipped, while the USD got some boost after Challenger Job cuts and the latest jobless claims came softer than expected. But Wall Street also reversed after oil resumed a downward journey again after a brief intra-short covering and Fed’s Daly sounded less hawkish than expected; the US10Y bond yield also eased slightly to around +4.70% from +4.80% hit earlier this week (at a 16-year high). On Thursday, Wall Street closed almost flat, but recovered from earlier deep losses as bond yield eased on hopes of a softer NFP/BLS job report Friday, which may keep the Fed on a less hawkish monetary policy path going forward.

On Friday, the latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +336K payroll jobs in September against +227K sequentially (m/m); +350K yearly (y/y), higher than the median market expectations of +170K and highest payroll job gain in 8-months.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for July was revised up by +79K to +236K, and the change for August was also revised up by +40K to +187K. With these revisions, NFP employment in the last two months combined was +119K higher than previously reported (against a 2M revision of -110K in the last report).

After substantial positive revisions for the last two months, the YTM average is now around +260K in 2023 against +399K in 2022, +562K in 2021, and the pre-COVID average of +300K (against the Fed’s targeted goldilocks rate of around +200K). The 3M rolling average of NFP job addition is now around +266K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +263K payroll jobs in September from +177K sequentially (m/m) and +344K yearly (y/y), higher than the market expectations of +160K, and substantially above the ADP figure +89K (released Wednesday). After substantial positive revisions throughout the year, the YTM average is now around +201K vs. the ADP average of +235K in 2023. The 3M rolling average of NFP private job addition is now around +195K vs. +194K ADP survey. The 2022 average of NFP Private Job addition was +377K vs. ADP average of +306K. Overall, the NFP and ADP private payroll job data is now converging gradually as there are only 3-months left for 2023.

The Government payroll, i.e., employment in Federal and state/local governments, was increased by +73K in September against +50K addition sequentially (m/m); and +6K yearly (y/y), higher than the market expectations of +10K. The YTM average is now around +59K in 2023 against the 2022 average of +23K. The 3M rolling average of NFP government job addition is now around +71K.

In Sep’23, notable NFP job gains occurred in leisure and hospitality (+96K), above the average monthly gain of +61K over the prior 12 months (ahead of Festival/holiday season); government (+73K), also above the average monthly gain of +47K over the prior 12 months; health care (+41K); professional, scientific, and technical services (+29K); and social assistance (+25K). Employment showed little change in other major industries, including mining, quarrying, and oil and gas extraction; construction; manufacturing; wholesale trade; retail trade; financial activities; and other services.

As per the Household survey, which includes non-farm jobs/employees and self-employed persons, the U.S. economy has added +86K employed persons in Sep’23 against the addition of +222K sequentially (m/m) and +156K yearly (y/y). The 2023 YTM average is now around +258K as per the Household survey against +260K in the Establishment survey. The YTM average of the addition of employed persons was +272K in 2022 and +512K in 2021 (COVID distorted).

The Household survey includes self-employed persons such as gig workers/freelancers, contractors, and agricultural and private household workers. In the household survey, individuals are counted only once, even if they have more than one job. In the establishment survey, employees working at more than one job (multiple job holders) are counted separately for each payroll. In September, BLS flash data indicated +123K multiple job holders (full-time workers -22K; part-time workers +151K).

In Sep’23, the number of employed persons in the U.S. (as per the Household survey) reached 161570K from 161484K sequentially (m/m) and 158850K yearly (y/y). The U.S. economy is now well above pre-COVID employment levels and in line with the Fed’s standard of maximum (inclusive and broad-based) employment. At a glance, the U.S. economy has produced over 100,000 K employed persons from CY1950 till now.

As per the ADP survey, the number of private employees was around 129045K in September against 134012K as per the BLS survey. The difference (4967K) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few months may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report.

In the household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll. In this way, there was a difference of around 5000K private payroll workers between the BLS/NFP and ADP surveys since /beginning.

As per household survey data, the nominal number of the civilian labor force increased by +90K in Sep’23 to 167929K. The nominal number of the labor force was around 165832 in Jan’23 and 164448 in Feb’20 (pre-COVID). The average number of additions in the labor force is around +233K against an average number of additions of employed persons +258K in 2023 (YTM). The labor force participation rate rose to 62.8% in Sep’23 from 62.8% sequentially, the highest since Feb’20 (pre-COVID). The labor force participation rate was 63.3% in Feb’20 (pre-COVID).

As per Household survey data, the nominal number of unemployed persons increased by +4K to 6359K in September against 6355K sequentially (m/m) and 5769 yearly (y/y). In Sep’23, the U.S. unemployment rate was unchanged at 3.8% sequentially (m/m), but was higher than 3.5% yearly (y/y), and remains at the highest since Feb’22. The market was expecting an unemployment rate of 3.7% in Sep’23.

The so-called U-6 unemployment rate, which also includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, eased to 7.0% in Aug’23 from 7.1% sequentially (highest since May’22; lifetime/recent low was 6.5% in Nov’22).

The U.S. Average Hourly Earnings (AHE) annual growth eased to +4.2% in September from +4.3% sequentially (m/m) and +5.1% yearly (y/y), lower than the market expectations of +4.3% gains (y/y) and the lowest since June’21. Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.00-3.5% on average for its +2.0% price stability targets (as per the pre-COVID trend).

The U.S. Average Hourly Earnings (AHE) was around $33.88 in Sep’23 against $33.81 sequentially (+0.21%) and $32.53 yearly (+4.15%); i.e. the U.S. AHE grew by around +4.2% in Sep’23 annually (y/y) from +4.3% growths in Aug’23, and below market expectations of +4.3%. On a sequential (m/m) basis, the AHE grew by +0.2% in Sep’23 from +0.2% sequentially (unchanged) and below market expectations of +0.3%. The Fed is looking for an average sequential AHE growth rate of around +0.3% consistently for its +0.2% sequential inflation target.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll was unchanged at 34.4 hours in September sequentially, in line with market expectations of 34.4 hours. Average Weekly Earnings (AWE=AWE*AWH) edged up +0.2% to $1165.47 in Sep’23 against $1163.06 sequentially and $1125.54 yearly (+3.55%). This translates to average monthly earnings of around $4661.89 in Sep’23 vs. $4652.26 sequentially (+0.21%) and $4483.62 yearly (+3.98%), against +4.18% in Aug’23 (the highest monthly growth since Feb’23).

The average monthly sequential growth of AWE is now around +0.3% against CPI growth of +0.4%; i.e., there were still no wage-inflation spirals and real wage growth is negative. The average (YTM) underlying yearly wage growth is now around +3.8% against CPI growth of +4.5% in 2023; i.e., real wage growth is still negative by around -1% on average. But in June, July, and August the real wage growth turned positive (y/y) by around +0.84%, +0.25% and +0.51% respectively.

In brief, the Sep’23 NFP/BLS job report may be termed as mixed/goldilocks rather than terrible or blockbusters. There was a huge beat in the estimate for the headline NFP job addition with substantial positive revisions for the last two months (as par NFP/BLS/Establishment survey). and a plunge in the number of additions of employed persons, keeping the headline unemployment rate at 3.8% with an improved labor participation rate (as per BLS/Household survey). Also, wage growth has moderated.

If we compare, the latest 3M rolling average of private job additions between NFP/BLS and ADP, it now stands around 195 vs 194; i.e. BLS data is now converging with ADP despite monthly volatile divergence; ADP data is not trash.

Overall, the U.S. labor market is cooling gradually without causing a hard landing; the headline unemployment rate may scale around 4.00% by Jan’24, and 4.2-4.5% by Aug’24 (H1CY24), while annual wage growth may moderate to around +4.00% by Jan’24 and 3.5% by Aug’24-all in line with Fed’s assumption for a soft landing; i.e. bring back price stability without causing mass scale unemployment, so that both Wall Street, Real Street as-well-as White House are all happy.

The YTM average employee additions (establishment survey) is now around +260K in 2023 against +399K in 2022, and +168K in 2019 (pre-COVID). The average number of additions of employed persons (household survey) is now around +258K in 2023 against +272K in 2022 and +192K (~200K) in 2019 (pre-COVID). The average number of additions in the labor force is around +233K against an average number of additions of employed persons +258K in 2023 (YTM). After considering labor force growth of around +3% from 2019 levels, the average number of employed persons addition should be now around +260K, in line with the present rate. The YTM average monthly wage growth is now around +3.8% in 2023 against +3.8% in 2022 and 3.25% in 2019 (pre-COVID) on average.

Overall labor market is gradually cooling, but still hot enough for at least another rate hike of +25 bps on 1st November’23 for a terminal repo rate of +5.75% and a long pause thereof. Also, core CPI inflation around +4.9% (last 3M rolling average) and +5.4% (H1CY23 average) is still substantially hot above +2.0% targets. Fed mainly looks around the 6M rolling average of core inflation for its rate decision.

Market wrap:

On Friday, Wall Street Futures and gold slid, while USD jumped briefly soon after the ‘blockbuster’ NFP Job report headline, but eventually reversed/recovered as the details/fine print of the overall NFP/BLS Job report in September was mixed/goldilocks in nature (rather than upbeat or terrible). Overall, the Fed may still go for another +25 bps hike on 1st November for a terminal repo rate of +5.75% and hold still at least June’24 (H1CY24).

On Friday, Wall Street Futures surged from the NFP panic low as a result of short covering and value buying. Blue chip DJ-30 jumped +1.18% after recovering almost +700 points from the NFP low. Similarly, tech-heavy NQ-100 surged +1.70%, while broader SPX-500 gained +0.90%.

On Friday, Wall Street was boosted by techs, communication services, utilities, industrials, healthcare, materials, financials, consumer discretionary, energy (oil recovered), and real estate, while dragged by consumer staples. Wall Street was also boosted by blue chip techs such as Microsoft, Nvidia, Apple, Meta, and Alphabet. Dow was also dragged by Walmart, Walgreens Boots, McDonald’s, Chevron, Verizon and Travelers.

On Friday, Gold slipped to almost 1810 soon after the ‘blockbuster’ NFP job report from around 1825, but eventually recovered to almost 1935, and closed around 1931, while USD/US bond yield also stumbled after initial gain. But the US10Y bond yield may also scale 5.05-5.25% in the coming days depending upon the Fed’s actual rate action/stance.

Conclusion:

The Fed is now preparing the market for higher for longer policy and another hike in November- then a possible end of the tightening cycle by Dec’23. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike. Fed never surprised the market with its rate action and by mid-October (after core inflation and labor/wage data for September), it will be clear whether the Fed will go for another +25 bps hike in Nov’23 before going for a final pause in Dec’23. Fed may not be in a hurry to cut rates before Sep’24.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.50.00-2.00) =0+2+3.50=5.50%

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation (CPI+PCE) =5.50% (for 2022); H1CY23 average core inflation around +5.40% (~5.50%)

As there is no significant easing of core inflation, especially core service inflation, the Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle. But, if core CPI inflation indeed eased further to below +4.0% by Oct’23, then the Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 in the Dec’23 SEP (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels (restrictive zone).

Looking ahead, oil prices may stay elevated in the coming months between $75-95 instead of the earlier $65-75 despite US efforts to bring more supply from, Mexico, Brazil, Iran, Iraq, and Venezuela. OPEC/Saudi Arabia will not ‘cooperate’ with the U.S. for ‘breach of trust’ in refilling SPR (as agreed ‘verbally’). Elevated oil prices around $90 will continue to boost energy/transportation/logistics costs and core inflation. Saudi Arabia/most OPEC producers and even Russia are now seeking $85 oil prices on a sustainable basis to fund budget deficits, EV transition, and also the cost of the Ukraine war.

China may also deploy more targeted stimulus to bring out the economy from the deflationary spiral in the coming days, which may also support elevated oil prices. But at the same time, China is now also producing higher oil by almost 5 mbpd against its demand of around 15 mbpd. China is also taking various steps to increase domestic production of oil rather than being too dependent on Russia, Iran, Saudi Arabia, and even the U.S.

The U.S., as a producer, is also benefitting from elevated oil prices. The U.S. is also a beneficiary of the Russia-Ukraine war and other geo-political tensions involving North Korea, China, and Iran. The U.S. defense/military industry is now booming. Also, the lingering Cold War mentality with China is resulting in supply chain disruptions and elevated inflations. The global economy continues to face the daunting challenges of macro-headwinds- elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations, and extreme weather conditions.

Going by the present trend/run rate, the U.S. core CPI may fall to +3.8% by Dec’23 and +3.4% by Feb’24, which may keep the Fed to hold on rates at +5.7% till at least Aug’24 before going for any rate cuts -25 bps or even -50 bps each in Sep’24 and Dec’24 (one rate cut every QTR end from H2CY24). Fed would like to boost Wall Street as well as Main Street before Nov’24 U.S. Presidential election. Fed has to ensure a soft landing; i.e. price stability along with financial/Wall Street stability and Main Street stability.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

Overall, it seems that the White House would be quite happy if the Fed could bring back core inflation towards 2% on a durable basis, while keeping the unemployment rate below 4% ahead of Nov’24, the U.S. Presidential election. The Fed is itself eager to cut its losses by cutting rates. The U.S. 2Y bond yield is now hovering around +5.15% and may soon scale 5.25-5.50% in hopes of another +25 bps Fed rate hike for a terminal repo rate of +5.75% by Nov’23. Even after the expected pause after Nov’23, the Fed may keep open for further hikes by projecting at least another 25/50 bps hike in H1CY24 (one rate hike at Q1 and Q2) if core inflation does not fall as expected as a result of the still hot labor market and other demand-related factors.

Bottom line:

Technical trading levels: DJ-30, NQ-100 Future, and Gold

Whatever may be the narrative, technically Dow Future (33293) now has to sustain above 33450-550 levels for any recovery to 33850/34000-34150/34250 and 34300/34555-34600/34825-35070/200-415/850 levels; otherwise, sustaining below 33200-32950 may again fall to 31700-31500 levels in the coming days.

Similarly, NQ-100 Future (15110) now has to sustain over 15350 levels for any recovery to 15500 and 15750/900-16000/655 in the coming days; otherwise, sustaining below 15300-15200 levels may again fall to 14900/14650 and 14575/14500*-14250/175-100/13890 and 13650-13125 levels.

Gold (XAU/USD: 1829) now has to sustain above 1840-1950 for any further recovery to 1867/1875-1885/1900 and 1910/1920-1926/1937 and 1952/1970 levels; otherwise, sustaining below 1835, may again fall to 1825/1810-1798*/1770 level in the coming days.