Stocks rise following a volatile session in response to the labor report. The S&P500 rose 1.4% to 1,951 and the Dow added 1.2% to 16,472. Markets may have been pushed higher on the expectation that the Fed will wait longer before raising interest rates. Immediately following the release of the data the S&P500 lost 1.6% but these losses were recovered and reversed later in the session. The VIX fell to 20.98 which is trending closer towards recent averages. Payrolls increased 142,000 in September which was significantly shy of expectations which called for an increase of 200,000. Similarly numbers for August were revised downwards. Earnings growth was non existent with the annual rate constant at 2.2%. The probability for tightening in December now sits at just 29% which is far below the indications that have been given off by members of the FOMC. Rob Carnell, economist at ING notes that the chances for tightening in December are now virtually zero and unless the Fed changes it’s guidance on policy and it’s tightening criteria it puts doubt on December as well. In response to the data the two year yield fell 7 basis points to 0.58% and the ten year fell 6 basis points to 1.98%. The dollar lost 0.2% against peers and the euro rose slightly to $1.1205.
Analysts have differing opinions on how today’s data will affect the Fed’s decision in September. 142,000 jobs were created in September compared to expectations of 201,000. August’s numbers experienced a heavy downward revision from 173,000 to 136,000. The unemployment rate was constant at 5.1% however the labor force participation fell. Michael Feroli from JPMorgan says this downgrades expectations for December citing growth concerns. Average hourly earnings were flat an an annual rate of 2.2% suggesting that wage growth is not picking up as expected. Two sources of optimism from this report include underemployment which dropped to 10% from 10.3%. Similarly the number of people working part time for economic reasons fell to its lowest level since 2008.
The US dollar index rose in the third quarter as the US economy appears strong relative to international peers. It was still lower against the euro and the yen over that period as investors priced down the possibility for Fed tightening. Nevertheless the index rose 2.5% in the third quarter but still stands 0.6% from a 12 year high that was reached in March. This reflects capital flight from emerging markets on top of Greece and China concerns over the quarter. The dollar is expected to appreciate with the US economic recovery in addition to weakness abroad. Domestic tightening and global easing are both conducive to upward momentum in the dollar. The market is currently only pricing in a 39% chance of tightening in December, which shows that the currency still may have room to run if the Fed continues with hawkish statements leading up to the FOMC meeting.
Emerging market yields are currently higher than during the taper tantrum. This signals stress levels that lead global investors to pull funds out of emerging markets ahead of monetary tightening in the US. The average yield on a JPMorgan high yield index is up 100 basis points to 6.65% since April. This number is influenced by developments in Ukraine and Venezuela as yields are in the double digits due to potential defaults. The South African ten year yield is up from 7.05% to 8.55% since January. The countries that are most vulnerable have weak economic fundamentals, slow growth, and a current account deficit that is financed by hard currency. Countries that meet this criteria include Brazil, Turkey, and South Africa. These developments have been solidified by the Fed’s sudden attention to the global picture. Barclays research notes that GDP missed estimates in almost all major emerging markets including Brazil, Russia, India, Korea, Mexico, and South Africa.