Jobs Week is Upon Us, Assuming we Avoid a Shutdown

• Angst over a possible shutdown is growing, and the initial reaction is bond bullish. Treasury yields are modestly lower this morning with a deluge of labor market reporting due this week, if the government can manage to stay open and issue said reports. That’s a big if that we discuss in more detail below. Currently, the 10yr Treasury is yielding 4.15%, down 4bps on the day, while the 2yr note yields 3.63%, down 1bp in early trading.  

 

• Before we turn to this week’s labor market reports we have to interrupt our regularly scheduled programming to mention that a government shutdown will happen if a Continuing Resolution is not approved in Congress before midnight tomorrow. If the government does shutdown, and we think it will, government-issued reports, such as the BLS jobs numbers, will likely be delayed which will force the market to focus on the privately sourced reporting such as ADP. The last shutdown occurred during Trump 1.0 in 2018 – 2019 lasting 35 days, the longest in history. The kneejerk market reaction is bond bullish, and obviously the longer the shutdown the risk of real damage to the economy moves higher.

 

• With the last of the August inflation numbers dealt with last Friday, attention now turns to the labor market. With analysts getting good at distilling the previously released CPI, PPI, and import price data, the PCE inflation series was as expected, painting a picture of inflation leveling off around 3.0%YoY. There was little expectation that inflation would improve, but at least there wasn’t an ugly surprise to the upside. Again, good work by those analysts teasing out the necessary information from the other price-related reports.

 

• While Fed speak was heavy last week, the one thing that was painfully obvious was the FOMC is fairly well divided between those that still harbor fears of inflation rebounding and those that are focused on the labor market. After this week, assuming we get all the reports, and that’s a big assumption, we’ll have a pretty good idea which group has the higher ground heading into the October FOMC meeting. The BLS Nonfarm Payrolls Report is due Friday with 50k new jobs expected and the unemployment rate remaining unchanged at 4.3%.

 

• Before Friday, the first of the labor market releases will hit tomorrow with the August Job Openings and Labor Market Survey (JOLTS). Recall in July’s report, the job-to-jobless ratio fell below 1.0 for the first time since April 2021. Thus, the number of unemployed jobseekers exceeded job openings for the first time in over four years. Expectations are for a decline in job openings to 7.1 million from 7.2 million in the prior month. A consensus print would mark the fewest number of openings since December 2020 and bring the job-to-jobless ratio down to 0.96. That’s a particularly discouraging departure point in pondering the potential for revisions to August’s payrolls numbers. The Quits Rate (voluntary separations/total employed) is expected to remain near 2.0% which is near the pre-pandemic level but off from the nearly 3.0% pace when labor market strength was peaking post-shutdowns and worker optimism over finding a better job was much higher than today.

 

• Wednesday brings the ADP Employment Change Report.  Recall this report had been given little respect in the last year when it typically deviated significantly from the initial BLS numbers. But with the huge revisions from BLS, ADP is getting renewed respect, or at least less derision, and that will be especially so if the government does shutdown and we’re left with only privately issued reports to lean on.  Last month, ADP reported 54 thousand private sector jobs when the BLS reported 38 thousand, and that’s prior to revisions that will be coming with this Friday’s BLS report. Expectations for September are for private sector job growth to slow yet again to 50 thousand.

 

• ADP’s three-month average change in private hiring from May to July was +37k when considering revisions. Private hiring per BLS over that same period averaged +99k with initial figures but revisions brought the average down to +40k, more in line with the ADP figures. Thus, we think this week’s ADP report will carry more weight than has been the case up to this point.

 

• The ISM Manufacturing Index for September will also be released on Wednesday with the headline measure expected to remain just below the Mendoza Line (IYKYK) of 50, indicating the sector remains short of expansion territory. The Prices Paid Index, and the Employment Index will get plenty of attention as the dual Fed mandates of price stability and full employment get an airing, at least from the manufacturing sector.

 

• The services side of the economy will get its ISM report for September on Thursday with a slight improvement from 50.1 to 50.5 expected, but that’s still dangerously close to contractionary territory for a sector that has carried the economy to this point. As in the manufacturing sector, the employment, and prices paid indices will give us a decent assessment of the inflation and labor conditions in the service sector.

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  Fed Funds Futures Still Leaning Towards Three 25bps Cuts by December

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Private-Sector Growth Slowing Dramatically

Source: ADP

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