A Weaker Pace of Hiring Increases Sentiment for 5.5% Terminal Fed Funds

Market sentiment has seemingly swayed with a growing possibility of an end to rate hikes. Despite a backward-looking Q3 GDP report near 5% growth, a resilient consumer and still too-high inflation, investors appear to be focusing on a slightly reduced level of Treasury issuance, at least relative to earlier forecasts, further disinflation nearer the Fed’s 2% target, and a slower but still solid pace of hiring.

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Recall, on Friday, nonfarm payrolls rose by 150k in October, less than the 180k gain expected according to Bloomberg.

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Meanwhile, September payrolls were revised lower from a 336k gain to a 297k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (October data + net revisions) was just 49k.

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Private payrolls rose by 99k in October following a 246k gain in September. Goods-producing payrolls declined by 11k, despite a 23k gain in construction payrolls. Manufacturing payrolls, meanwhile, dropped 35k in October. Private service producing payrolls rose by 110k in October, down from a 218k gain in September.

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Education and health payrolls led the gain in service payrolls in October, rising 89k following a 78k increase the month prior. Also, leisure and hospitality payrolls gained 19k, and professional and business services payrolls rose 15k, due to a 7k increase in temporary help payrolls. On the other hand, trade and transport payrolls fell 1k at the start of Q4 despite a 1k gain in retail trade payrolls. Additionally, financial payrolls declined 2k, and information payrolls dropped 9k in September. Finally, government payrolls rose by 51k in October following a similar gain in September.

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Household employment dropped by 348k in October following an 86k increase the month prior. The labor force, meanwhile, declined by 201k following a 90k rise in September.? Thus, the unemployment rate unexpectedly ticked up from 3.8% to 3.9% in October, the highest level of joblessness since January 2022. According to the median forecast, the unemployment rate was expected to remain steady at 3.8%. However, October’s 3.9% unemployment rate marks the 21st month below 4%, the longest stretch since the 1960s.

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The labor force participation rate, meanwhile, declined a tenth of a percentage point to 62.7% in October, a three-month low, and further below the pre-pandemic rate of 63.3%.

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Also, average hourly earnings rose 0.2% in October, a tenth of a percentage point less than expected and following a 0.3% increase in September. Year-over-year, wages rose 4.1%, down from the 4.3% annual gain in September and the weakest gain since June 2021.

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Finally, the average workweek ticked down from 34.4 to 34.3 hours in October.

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Bottom Line: Friday’s report reinforces the Fed’s characterization of a “strong” economy and “strong” job creation. While the monthly pace of hiring has slowed somewhat, month-to-month volatility aside, the longer-run trend remains well above 200k, perpetuating the notion of a tight labor market.?Investors, meanwhile, appear hyper-focused on the modest improvement in conditions, increasingly skeptical further policy action is needed.

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From the Fed’s point of view, a minimal reduction in wage pressures and uptick in the unemployment rate is a welcome step in the right direction in terms of removing the imbalance between labor demand and labor supply and returning the jobless rate to a more sustainable level within the full employment range.?However, coupled with a resilient consumer and stellar growth in Q3, it’s not yet enough to surmise policy has reached a sufficiently restrictive level. Inflation still remains too high, suggesting there may still be more work to do.? ?

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The Fed opted to leave rates unchanged for the second consecutive meeting in November, but the Committee left the door wide open for not only further policy adjustments but also an ongoing elevated level of rates, well beyond market expectations. The Fed reduced its outlook for rate cuts from 100bps to 50bps in September, and should inflation fail to improve as expected, the Fed could remove any expectation for rate cuts in the new year. Market participants, however, are not convinced, with the forward curve implying the first rate cut by March.

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According to Bloomberg News, the natural rate of interest, or the cost of capital that stabilizes savings with investment and inflation, is rising, potentially reaching 2.7% by 2050 from a low of 1.7% in roughly 2015. If accurate, according to the model’s calculations, the nominal 10-year Treasury could potentially settle between 4.5-5% or higher.?

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The natural rate, or again the equilibrium rate of interest that is neither expansionary nor contractionary, is not technically observable. Nevertheless, a high(er) neutral rate suggests current monetary policy may prove less restrictive than previously thought, either increasing pressure on Fed officials to keep rates elevated for longer, or potentially standing as a somewhat moot point should economic conditions evolve as needed organically to reinstate price stability.

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This week Fed officials emerge from their silence with Fed Governor Lisa Cook first up later today at 11:00 a.m. ET on financial stability. Tomorrow, we will hear from a number of Fed officials including Chicago Fed President Austan Goolsbee, Fed Vice Chair for Supervision Michael Barr, Kansas City Fed President Jeffrey Schmid, Fed Governor Christopher Waller, New York Fed President John Williams, and Dallas Fed President Lorie Logan.

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The economic calendar is light this week, beginning with the Senior Loan Officer Opinion Survey on Bank Lending Practices report released today.?

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Otherwise, this morning, the economic calendar is empty.

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Tomorrow, the U.S. trade balance is expected to widen from $-58.3b to -$60.0b in September and consumer credit is expected to increase by $9.000b in September.

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On Wednesday, wholesale inventories data will be released along with MBA mortgage applications.

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On Thursday, initial jobless claims are expected to rise from 217k to 220k in the week ending November 4.

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Finally, on Friday, the preliminary November print from the University of Michigan on consumer confidence will be released. Consumer confidence has been on the decline as of late, off 8.6 points from the recent peak, weighed down by both current assessment and future expectations. Of course, as consumers often do, while indicating fatigue or pressure, they continue to spend, suggesting any elevated notion of concern from higher prices or higher financing costs has translated into a slower but still very positive pace of expenditures.?

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-Lindsey Piegza, Ph.D., Chief Economist

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