Tomorrow’s Job Report Could Crush The Stock Market

roll the dice

Maartje van Caspel/E+ via Getty Images

The Oct. 7 jobs report will be a big one for the markets as it will be the last report ahead of the Nov. 2 FOMC meeting. There will also be a critical report, because following the weaker than expected ISM manufacturing data, the market started to float the idea of ​​another potential Fed pivot point. If he’s strong, the job report might thwart that idea again.

With September’s forecast for 260,000 new jobs and a 3.7% unemployment rate, there’s a good chance the data will come in hotter than expected. That would be a big shock to the stock markets.

ISM data point to a recovery in the labor market

ISM services data for Oct. 5 showed solid improvement in service provider hiring in September and is in a three-month uptrend. The index rose to 53 in September, a steady improvement, from 50.2 in August and 47.4 in June.

ISM data

Bloomberg

In addition, the survey showed that 23.7% of companies were hiring more workers, 17.9% fewer and 58.4% the same workers – an improvement on overall September hiring trends for the service sector and an improvement from August.

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ISM order data

Bloomberg

Historically, the ISM employment survey has had a solid relationship with changes in nonfarm payroll reports. The timing of the ISM service data is not perfect, but it tends to be about a month ahead of the BLS job data. While the services index doesn’t tell us the size of the BLS jobs report’s potential gains or losses, it can tell us if the BLS jobs report is likely to be higher or lower than the previous month.

Again, this isn’t perfect, and there are some outliers. But in general, when ISM services data rises from the previous month, nonfarm payrolls tend to rise and vice versa.

ISM vs. BLS order data

Bloomberg

More recently, however, there has been a small shift with no monthly lag. Given that the ISM employment index has risen over the past three months, chances are the BLS data is above last month’s reading of 315k.

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ISM vs. order data

Bloomberg

It would be a massive beat and unexpected if that happened. It would wipe out dovish pivot hopes and prompt the market to consider the potential for the Fed’s interest rate to rise above 4.6%.

unemployment claims

In addition, the four-week average of initial jobless claims has fallen since peaking in late July. Historically, the unemployment rate has tended to follow this trend, with the four-week moving average about 35 days ahead, and with claims peaking in July, it seems possible that September’s unemployment rate could fall and fall below the could fall 3.7% forecast.

Unemployment vs. Claims

Bloomberg

Again, the Fed has been waiting for the unemployment rate to rise to slow the pace of inflation and for higher wage pressures to ease. The market thought this might happen given the recent JOLTS data measuring the number of vacancies. JOLTS data fell to around 10 million opens from around 11 million last month. It could be a very early sign that perhaps some of these tight working conditions are beginning to ease. But at the same time there are still 1.7 times more vacancies than unemployed. That number was stable, around 1.2 through 2018 and early 2020.

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Assuming the number of unemployed in August was 6.04 million, the number of job offers would have to fall from the current 10.0 million to around 7.2 million. That would suggest that the Fed still has work to do to bring those job openings down to pre-pandemic levels.

Jerky vs. unemployed

Bloomberg

Whether tomorrow’s data is good or bad, the Fed still has work to do. It will only tell us if the Fed is going in the right direction. However, much recent data suggests that the labor market is still very healthy and has shown little or no sign of slowing down. If the BLS report shows anything similar, it will once again dashed any hopes of another dovish Fed change and the market would likely give back much of this week’s gains fairly quickly.

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