What do the recent US non-farm payrolls mean for markets?

Overview

US job additions for September has been strong – too strong in fact. The US non-farm payrolls crushed the range of analysts’ estimates by a wide margin to come in at its highest level in four months (254,000 versus 147,000 estimated). Past month’s data was also revised up by 17,000 to 159,000. The unemployment rate came in lower at 4.1% versus the 4.2% expected. Even wage growth accelerated to 0.4% month-on-month from the 0.3% prior.

The confluence of all the data points seem to suggest strength in labour conditions as the clear takeaway, probably even offering some surprises for markets with the current level of interest rates. The level of surprise was presented with a surge in US Treasury yields, as market rate expectations reprice to be more aligned with policymakers’ views. The US two-year yields soared 21 basis points (bp), US 10-year yields were up 12 bp, overall lifting the US dollar by 0.54% last Friday in its fifth consecutive session of gains.

What’s next?

We believe the labour data will likely anchor the case for Federal Reserve (Fed)'s rate cuts to tread in intermittent steps of 25 bp in November and December. The degree of outperformance in the US non-farm payrolls seems to make the 50 bp cut in September look like an overreaction from the Fed and called for less urgency in future policy easing. With just three more job data points by the end of this year, there are the odds that the unemployment rate could undershoot the Fed’s own economic projections of 4.4% by end of 2024.

The latest report seems to mark a deviation from the previous strings of weaker US non-farm data, which will leave attention on subsequent readings to dispel any scepticism. If US job additions continue to hover above the 200,000 range, which is higher than average pre-Covid years, we could see markets starting to price for the Fed to keep rates on hold. A return to rate hikes remains the improbable scenario, as it will hurt the Fed’s credibility.

How may markets react?

The jobs data will add to the series of US economic surprises lately, with the US economic surprise index reverting into positive territory last week to come in at its five-month high. Generally, with economic conditions surprising on the upside, risk assets may tend to be well-supported, which therefore could see the S&P 500 eyeing for yet another fresh record high. Small-caps will remain on the radar as well, currently still trading below 2021 levels and leaving room for catch-up if the trend of economic optimism continues.

An upward trendline for the Russell 2000 remains in place for now, which may leave the 2,130 level on watch as a potential support confluence for any longs. The 2,283 will be a resistance to overcome, with any break above to a new higher high likely to leave the November 2021 high at the 2,460 level in sight for a retest.

Gold prices have been surprisingly resilient, hanging around its record high level despite a surge in Treasury yields and a stronger US dollar. Geopolitical risks in the Middle East may remain the overriding theme for now, supporting safe-haven flows for the yellow metal, which limit the downside reaction from a less-dovish market rate pricing. Prices hanging around resistance could be a sign of resilience, which may increase the odds of a break to fresh highs, especially as near-term technical conditions have now shifted towards more neutral levels. The daily relative strength index (RSI) has been trading above its key mid-line since July this year, which keeps an upward bias intact.

The US dollar has surged as much as 2.4% over the past week, heading back to retest a resistance confluence at the 102.30 level, where a trendline resistance coincides with its daily Ichimoku Cloud. With its daily RSI heading above its mid-line for the first time since July this year, the trend may have shifted towards a near-term upward bias. Any retracement towards the 101.40 level may leave one to consider longs, as its RSI heads to retest the mid-line in coincidence with a previous horizontal resistance-turned-support.