The recent upward movement in interest rates is focusing investors' attention more than ever on macroeconomic data, in search of signs of a slowdown. While activity data are indeed showing signs of deceleration, albeit gradual, the job market remains inexorably buoyant, while the Fed uses it as an example to justify its hawkish stance and maintain its restrictive monetary policy. Indeed, with no deterioration in the labor market, growth is unlikely to falter quickly, which maintains the risk of persistently higher inflation.
ADP's publication of a sharp slowdown in private-sector job creation in September was therefore greeted with relief. However, ADP's estimates for recent months, notably June and July, may have been a long way off those of the BLS. This month was no exception, so the relief was short-lived. Job creation for the month of September was up sharply and above expectations, at 336,000 versus 170,000 expected. This figure is the highest since January. However, it masks major disparities between sectors, with three of them accounting for the bulk of job creations (hotels/leisure, government and healthcare). The previous two months were, moreover, revised upwards by over 100,000 creations. These data are clearly not likely to allow the Fed to ease pressure. Michelle Bowman, one of the Fed's governors, believes that further rate hikes will be necessary if inflation is to return to the 2% target. Bond investors seem to have got the message, as US long rates rose by almost 10 bps on Friday to 4.8%. On the equity markets, on the other hand, the reading of the employment report seems quite different, as the main US indices ended in the green, after an initial phase of decline. Preferring to see the glass half-full, equity markets clung to the report's good news: the further easing of wage pressures. Over the month, hourly wages rose by 0.2%, or 4.2% on an annualized basis, compared with 4.3% the previous month. Over three months on a rolling basis, the annualized rise was 3.4%. The rate was even 3% in private-sector services. This positive trend was underscored by Cleveland Fed President L. Mester, a member with a rather hawkish reputation. In fact, if productivity growth is taken into account, the Fed's target doesn't seem far off.
Finally, we'll end this weekly post with this weekend's geopolitical news, with the Hamas attacks on Israel and the Hebrew state's military response. Beyond the catastrophic human aspect, the risk to financial markets seems fairly limited for the time being. However, with Iran likely to support Hamas, the risk of escalation is present, with a potential direct impact on oil prices and a consequent resumption of inflation.