Weak Jobs Report Will Not Likely Derail the Fed’s Attitude Towards Tapering in November

The U.S. added fewer jobs than forecast for a second month in September, signaling weakness in the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end.

Nonfarm payrolls increased by only 194,000 last month, the smallest advance this year, against median expectations for a gain in September of 500,000. However, the previously reported nonfarm payrolls for both July and August were revised upward:

A large miss in public sector education accounted for much of September’s payroll shortfall. Public sector jobs fell by 123,000, mostly in education. The shortfall in public sector education jobs is partially a seasonal problem. We usually see more than a million workers return to their jobs in education in September. The need to close schools due to quarantines as cases spread undermined those gains along with a hesitancy by workers to return to low-wage support jobs and recent medical reports that show the effectiveness of some vaccines after a four-to-five-month period being lower than originally anticipated (a motivation for the U.S. Food and Drug Administration to approve booster shots for all demographics, not just those who are 'high risk' or over 65).

The Fed is looking closer at the data within the payroll report than merely the headline number. For example, private payrolls rose by 317,000, just under the expected increase for this gauge. This helped reduce the unemployment rate by 0.4% to 4.8% in September, partially reflecting a decline in the size of the labor force:

Additionally, the Fed may be altering its attitude towards what is transitory and what is not. While the cost of some goods and services are apt to rise and fall, such as home utility bills or gas prices at the pump as energy prices at their highest levels since 2014, most prices for goods, and especially services, have historically been very sticky.

One indicator that tends to be sticky is the price of labor. It’s not often you see wage decreases, especially when there are still roughly five job openings for every four people looking to find a job. In the September jobs report, average hourly earnings swelled 19 cents an hour, or 4.6% from a year ago, a sharp broad-based acceleration from last month.

The collective fixed-income market agrees that this job report does not affect the Federal Reserve’s attitude towards turning off the cruise control on their $120 billion in asset purchases a month by grinding rates higher throughout the week. This was particularly displayed Friday where, after a slight pause that followed the early morning release of the weaker than expected nonfarm payrolls and unemployment report, the bellwether ten-year Treasury yield regained its initial drop and ended the day higher, at 1.6118%:

The Federal Reserve is assigned many roles, with their two chief responsibilities being to maintain price levels while supporting full employment. Even though September was a disappointment regarding overall jobs in the economy and there are still roughly five million less jobs than prior to the pandemic, there were many strong data points, including the drop in the unemployment rate.

The Fed can not afford for its transitory inflation expectations to be too wide of the mark, or they face the risk of failing on both their obligations. To this point, the Fed is still likely to initiate their quantitative easing tapering in November, or at least announce such after their November 2^nd-3^rd Federal Open Market Committee meeting, which will undesirably be prior to the next jobs report set for Friday, November 5^th (does anyone really think that the Fed doesn’t know what the jobs report will look like two days ahead of its announcement?).

Bottom line is that the Fed may commence cutting back only on its $40 billion a month of mortgage-backed securities portion of its total $120 billion of purchases, but nevertheless, tapering is likely to commence, driving interest rates higher.