2023-10-06 10:02:50 ET
Summary
- U.S. Treasury yields increased toward and above the critical 5.0% ahead of the nonfarm payroll employment report for September 2023.
- Government jobs and leisure and hospitality jobs saw significant increases in September.
- The Federal Reserve is expected to raise interest rates by 25 bps in November or December, potentially more than expected.
- Warning: Watch out for selling pressure in stocks supplying AI.
Ahead of the nonfarm payroll employment report for September 2023, U.S. Treasury yields increased sharply. The 10-year treasury ( IEF ) approached 5.0% earlier this week, only to back off. The jobs growth surge in September will likely push Treasury yields to multi-year highs.
Nonfarm payrolls increased by 336,000 , compared to the 160,000 expected and 227,000 prior. The job market remained tight as the unemployment rate did not change at 3.8%. Jobs increased in leisure and hospitality, government, healthcare, professional, scientific, and technical services, and social assistance.
Government Jobs Increased
Some readers might view the government job increases as unsustainable. The government narrowly averted a debt-ceiling shutdown last weekend. Still, government employment increased by 73,000. This is above the average monthly gain of 47,000 over the last 12 months. Broken down, the economy added 29,000 in state government education. Local government jobs, excluding education, grew by 27,000.
Leisure and Hospitality Jobs Increased
The leisure and hospitality sector added 96,000 jobs, well above the average monthly gain of 61,000 over the prior 12 months. The growth contradicts the downtrend in leisure-related stocks. For example, United Airlines ( UAL ) shares peaked at over $56. It traded recently at $41.32 on fears of rising operating costs. Its pilots approved a massive 40% pay hike. This is the largest contract in US airline history.
Lodging stocks like Hilton ( HLT ) are steady, while Hyatt Hotels ( H ) and Wyndham Hotels & Resorts ( WH ) are sharply lower. Expect business travel growth and strategic growth plans to continue lifting jobs in this sector.
Employment in food services and drinking places increased by 61,000 over the month. Looking ahead, this growth may reverse. Earlier this week, Walmart ( WMT ) made a bold claim that Novo Nordisk's ( NVO ) Ozempic was starting to have an impact on shopper behavior .
The claim is questionable. Walmart executive John Furner, CEO of US Operations, has no way of knowing which customers are taking the expensive $1,000 per month drug. Demand for goods is more likely to fall due to high inflation. Inflation rates change while high prices are here to stay. This will dent demand when consumers have lower disposable income.
Healthcare
Healthcare added 41,000 jobs last month. This is below the average monthly gain of 53,000 over the last 12 months. As always, income investors should not rush out to buy healthcare facility REITs like Medical Properties ( MPW ). Investors should have a rule of avoiding companies that slash their dividends . In the last month, MPW stock lost 24.39%, offset by its 15 cent a share cash dividend.
Professional, Scientific, and Technical Services
Employment in this segment increased by 29,000. People who work in those businesses have a particular specialized skill set. They have knowledge that artificial intelligence cannot replace. Fears that AI would replace such jobs are unfounded. Investors in the picks and shovels of AI are starting to show bullish fatigue. For example, Super Micro Computer ( SMCI ) shares are trading in a $230 - $290 range after peaking at $350. Nvidia ( NVDA ) might take another run back to $500 if it breaks through resistance levels at the 20-day and 50-day simple moving averages. Ahead of AMD's ( AMD ) AI GPU, an analyst already is questioning its data center revenue outlook .
Readers should recognize there's a weak correlation between my commentary on AI stocks and jobs created in this specialized job segment. Looking ahead, expect companies to continue hiring skilled workers despite the availability of AI.
Transportation and Warehousing
Jobs increased by just 9,000 in this industry. The headline change that mattered was the five-year collective bargaining agreement between UPS ( UPS ) and Teamsters. The wage increases are significant. As more companies settle on higher wages demanded by unions, the risk of permanent inflation rises. This poses a threat to the Federal Reserve, which has a mandate of achieving price stability.
Air transportation jobs increased by 5,000. Conversely, airline investors will observe no correlation between the monthly job growth and the stock price. American Airlines ( AAL ) trades at a price-to-earnings of 3.48 times. AAL stock is ~33% below its 52-week high.
Wage Growth
Average hourly earnings increased by 0.2% to $33.88. It's up by 4.2% over the past 12 months. Here are the average earnings by industry, seasonally adjusted below. The bubble size represents the employment level in thousands.
July and August 2023 Revisions
At the bottom of the BLS report are the NFP revisions. For July, the BLS revised total nonfarm payroll employment up by a significant 79,000. The original 157,000 figure increases to +236,000. The August NFP employment increased by 40,000, or from 187,000 to 227,000.
The revisions add an important 119,000 more jobs than previously reported. Upon the release of this report and the two revisions, markets will need to price in the hot jobs market. This will pressure stocks.
Fed Reaction
Readers need not speculate on what the Fed will do next. Fed Chair Jerome Powell already laid out the interest rate policy plan for the rest of this year. The Fed will increase rates by 25 bps in November or December. Worryingly for bulls, the committee may raise rates by more than expected.
The hiring slowdown did not happen last month. Factoring the lag between rate hikes and an economic slowdown, the Fed's policy of higher rates for longer ("H4L") will put pressure on credit markets.
seekingalpha
View bond yields by clicking on market data and selecting bonds .
The market is watching the 10-year Treasury yield. Once it crosses 5.0%, expect the yield to stay there. Already, the 20-year and 30-year treasury are at that level.
Your Takeaway
The bond market is further pricing in the H4L - higher rates for longer - catchy mantra. These increasing yields will continue to pressure the equity market. The argument that dividend income and REIT stocks are attractive compared to a 5.39% yield from the money market fund ( SNAXX ) has become increasingly weaker. Be wary of averaging down on this sector when the Fed has yet to signal plans of a rate cut.
For further details see:
What The Fed Might Do After The September 2023 Jobs Report