Hot Hot Hot

The September nonfarm payroll report blew away all expectations, with the economy adding 254,000 jobs last month versus expectations for a gain of 150,000. The pace of hiring hit a 6-month high, with the prior two months also seeing an upward revision of 72,000 jobs. The unemployment rate ticked down to 4.1%, which should allay market fears about the Sahm Rule.

Along with the stronger-than-expected hiring, wage inflation also ticked higher, coming in at a year-over-year rate of 4.0%—the highest pace in four months—versus expectations of a gain of 3.8%. Given a more hawkish tone from Federal Reserve Chair Jerome Powell in recent days, the jobs report likely pushes the Federal Open Market Committee to issue a 25 basis-point cut at its November policy meeting, a downshift from the 50 basis-point reduction last month. We are seeing in this priced into the futures market, in which odds of the latter move have fallen from 35% to 15%. This is leading to a sharp sell-off in bonds, with the 2-year Treasury yield jumping more than 15 basis points and the benchmark 10-year yield up just over 10 basis points, modestly flattening the yield curve.

Equities are also responding well to the report, with S&P 500 up just above 0.5% at the open, with small-caps outperforming, up nearly 1.5%.

The bottom line is that the September jobs data supports our view that the economy is headed for a rotation, not a recession. While economic growth has undoubtedly slowed, so has inflation, and we do not expect the economy is on the precipice of a more troublesome deceleration. Today’s payroll report should calm concern that U.S. employment is approaching a downward inflection point. That gives credence to our position that the market will rotate into asset classes, such as value cyclicals, dividend payers and—most of all—small caps, which benefit from both lower rates and stable growth.