October Non-Farm: Is the Hurricane Obscuring the View?

How much significance do the "bouncing" non-farm data still hold? The non-farm employment figures went from "hot" to "freezing" in just one month, and downward revisions seem to have become a common practice. The October non-farm data is almost a repeat of August—similarly affected by uncertainties like hurricanes and falling short of expectations, yet the market remains so calm. What economic and market signals are worth exploring behind the non-farm data? We believe this may be a rare window to observe current market expectations and positions:

First, the fundamental employment situation in the U.S. is poor, but due to temporary shocks, the "bad" is not thorough enough.

Second, in terms of the short-term market, although there were prior risk warnings from Federal Reserve and White House officials, market volatility is restrained (Figure 1), indicating that positions are not extreme, and the current trading direction in the market, such as re-inflation, can continue for a while.

Correspondingly, the October non-farm data helped consolidate expectations for two more rate cuts this year, but it had little impact on the tightening adjustment of the rate cut path for next year.

Third, by observing the reactions of various assets after the data release, we see the current relative strength of assets, with dollar bulls and U.S. Treasury bears undoubtedly being the strongest, while U.S. stocks and precious metals show weakening upward momentum, especially silver.

The significant shortfall in non-farm employment may not be fully explained by random factors. In October, non-farm employment increased by 12,000, far below Bloomberg's consensus expectation of 100,000, with the previous value revised down from 254,000 to 223,000. Breaking down by industry structure seems to be less optimistic, as employment growth still relies on government sectors and the education and healthcare industries, which together added 97,000 jobs.

Manufacturing employment decreased by 46,000, closely related to the strike at Boeing and the impact of hurricanes, as reflected in the October ISM Manufacturing PMI of 46.5. However, the leisure and hospitality services and retail sectors saw employment decline after the summer peak season. Professional and business services employment fell by 47,000, with "temporary help services" being a highly cyclical subcategory, which saw a significant decrease of 49,000, likely not solely due to adverse weather conditions.

The unemployment rate remains low, primarily due to a decrease in new entrants to the labor market. After retaining three decimal places, the U.S. unemployment rate slightly rose to 4.145% in October (previous value 4.051%). Among the unemployed, the number of "new entrants to the labor market" has continuously declined from September to October, mainly due to a decrease in immigrant groups and recent graduates, which helps keep the unemployment rate low, offsetting the upward pressure on the unemployment rate from the increase in "permanent unemployed individuals."

The significant drop in new jobs in October can be explained by hurricanes and the Boeing strike, but there are other signals indicating a slowdown in the labor market. First, job vacancies fell more than expected. In September, JOLTS job vacancies were 7.443 million, significantly below expectations, with the vacancy rate dropping from 4.7% to 4.5%, and the ratio of job vacancies to unemployed individuals falling to 1.09, below 2019 levels.

Second, private sector layoffs rebounded. The private layoff rate in September JOLTS rose to 1.3%, and the number of layoffs reported by Challenger companies (12-month moving average) has shown a rebound trend since June of this year.

Third, the duration of unemployment continues to rise. The proportion of unemployed individuals who have been unemployed for more than 15 weeks increased further to 40.4%, up 7.1 percentage points over the past six months; the average duration of unemployment rose to 22.9 weeks, an increase of 3.0 weeks over the past six months.

Fourth, the manufacturing employment market remains weak. In October, the ISM Manufacturing PMI employment component slightly rebounded to 44.4, still significantly below the expansion line. The manufacturing employment diffusion index (a leading indicator) continues to decline. The effect of interest rate cuts on employment remains insufficiently evident.

After the non-farm payrolls were released, expectations for two rate cuts this year were stabilized. As Federal Reserve and White House officials had previously indicated that "hurricanes" and "the Boeing strike" would impact October employment, the market had a psychological expectation of a "disappointing" non-farm payroll this time. After the data was released, the 2Y U.S. Treasury yield fell by 0.17% before rebounding. The CME FedWatch Tool shows a 98% probability of a 25bp rate cut in November, with the probability of 25bp cuts in both November and December rising from 75% the previous day to 82%.

Observation window for market momentum. Although the overall market volatility is low, we can still capture some clues by observing the performance of major related assets after data releases:

First, the reflation trade represented by going long on the dollar and short on U.S. Treasuries remains the strongest logic in the short term. A true turning point may require the election outcome and the Federal Reserve to strengthen its determination to cut rates next year.

Second, possibly due to non-extreme positions, U.S. stocks continue to be a favored direction for funds, but concerns about reflation and even potential stagflation limit the upside potential for U.S. stocks Third, precious metals represented by gold do not seem to be riding the "tailwind" of re-inflation, and the upward momentum is relatively weaker. However, considering the support from national purchases, the risk for silver may be greater.

Author: Shao Xiang (S0100524080007), Pei Mingnan, Source: Chuan Yue Global Macro, Original Title: "October Non-Farm: Is the Hurricane Obscuring the View?"