September labor reports paint a puzzling picture for markets

Markets are keeping a close eye on unemployment claims today, and tomorrow, all eyes will be on the Non-Farm Payroll report.

By Ahmed Azzam | @3zzamous | 5 October 2023

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  • Job growth steady, not spectacular in September.

  • Employment expansion persists for the eighth consecutive month.

  • Non-farm payroll report expected to rise by 170,000 jobs.

  • Stronger report could lead to yield curve bear steepening.

This week's reports from purchasing managers and other sources indicate that companies are indeed hiring in September, though not at an extravagant pace. This signals that Friday's upcoming non-farm payroll report may show some growth but might fall short of the high expectations. This situation could lend support to the ongoing trend of a bullish steepening in the Treasury market.

In yesterday's ISM services report, we observed the eighth consecutive month of employment expansion this year. Additionally, a report from S&P Global US services revealed that staffing numbers in employment rose at the swiftest pace seen in three months, following a consistent upward trajectory since July 2020. Earlier this week, the ISM manufacturing report also exhibited a shift from employment contraction to expansion. Correspondingly, the S&P Global manufacturing data indicated an increase in the workforce, aimed at expanding future capacity. Interestingly, these reports suggest that job gains are primarily due to attrition, which raises the potential for a downside miss and an increase in participation – an event known as a bull steepener. In contrast, ADP's addition of 89,000 jobs this week fell short of expectations.

On Tuesday, the JOLTS report illustrated that quit rates have stabilized. This implies a potential increase in labor force participation, suggesting that workers are prioritizing job security over higher wages, especially with the specter of a looming recession.

The consensus for the September non-farm payroll report is an expected rise of 170,000 jobs. If this figure surpasses expectations, it could lead to a yield curve bear steepening, where long-term interest rates rise faster than short-term rates. This typically indicates growing inflationary expectations.

Conversely, a miss in the non-farm payroll report might trigger a bull steepening, with short-term interest rates declining faster than long-term yields, possibly signaling an impending economic recession.