Markets Brief: What investors should watch out for in the September jobs report

The Federal Reserve’s determination to fight inflation left stocks tumbling in the final days of the third quarter, and for the market going forward, much will depend on how quickly the economy begins to slow and to what extent.

Against this backdrop, investors will be keeping a close eye on the jobs data for September, which will be released this coming Friday. Although companies plan to cut staff and slow hiring, the labor market has remained strong. Although this is usually a sign that the economy is not currently in recession, it does not mean that we are not ahead, nor a good sign for inflation.

“What we’re looking for, and what I think all investors are looking for, are signs that the labor market is starting to weaken,” says Eric Winograd, senior economist at AllianceBernstein. “It’s an essential element for controlling inflation.”

Data in the monthly jobs report can be very volatile and are often subject to quite substantial revisions in the months following their initial release. Thus, investors should be wary of putting too much stock into a month’s data set. However, there are key trends to watch.

Will job growth really start to slow?

So far, expectations of a significant slowdown in employment growth have not materialized. Non-farm payroll employment has increased by an average of 380,000 over the past three months. Although this is below last year’s average of 490,000 per monththis is still a relatively high level of employment growth.

“Anything over about 75,000 to 100,000 matters as the labor market strengthens further in terms of payroll numbers,” Winograd says. “I don’t think there’s any reason to see that [normal payroll additions] this month.”

For the September report, economists expect payrolls to increase by 250,000 according to FactSet, which would be down from the 315,000 new jobs created the previous month. An increase of 250,000 would be the smallest gain since December 2020, when employment fell by 115,000.

The continued strength in hiring partly reflects the large number of vacancies.

“I think companies struggled to find labor earlier in the year. [economic] cycle … companies continue to fill vacancies from the beginning of the year,” says Winograd. Additionally, a labor force participation rate, the percentage of the working-age population able to actively seek employment, has yet to recover to pre-pandemic levels, compounding the gap between labor supply and demand.

Morningstar Chief Economist Preston Caldwell also says labor force participation is a data point to watch. “We expect that participation in the labor marketadjusted for demographicsto surpass pre-pandemic rates as widespread job availability attracts formerly discouraged workers,” he says.

Will wage growth start to slow?

The mismatch between labor supply and demand has put upward pressure on wage growth, a factor that would keep inflation high and one that the Fed is watching closely.

“To get inflation back under control, wage growth would have to really slow down,” says Winograd. According to the August jobs report, wage growth has increased by 5.2% over the past 12 months. “At the moment it’s just that it’s high, but we don’t see it increasing any further.”

The question is how long will it be before signs of a weaker labor market, and hence a deceleration in wages, appear. If the Fed sees the labor market is still too strong, that’s a sign for it to keep raising rates and keep them high for longer, Winograd says.

“The risk then, of course, is that because monetary policy works with a lag, that by the time it hits the economy, the Fed may have gone too far.”

Events scheduled for the coming week include:

  • Wednesday: Lamb Weston (LW) brings earnings.
  • Thursday: McCormick & Co (MKC)Conagra Brands (ACG)and Constellation brands (STZ) report earnings.
  • Friday: September jobs report. Tilray Brands (TLRY) brings earnings.

For the trading week ended September 30:

  • The Morningstar US Market Index fell 2.69%.
  • The best performing sector was energy, which rose 2.21%.
  • The worst performing sectors were utilities, down 8.55%, and real estate, which fell 4.41%.
  • Yields on the 10-year US Treasury rose from 3.69% to 3.80%.
  • West Texas Intermediate crude oil prices rose 0.95% to $79.49 a barrel.
  • Of the 851 U.S.-listed companies covered by Morningstar, 230, or 27%, were up and 621, or 73%, were down.

Which stocks are rising?

Shares of drugmaker Biogen (BIIB) has rallied around the release of data from its phase 3 trial for lecanemab, a treatment for Alzheimer’s disease.

“Given the strength of the data, we expect lecanemab to be one of three new Alzheimer’s drugs likely to hit the market within the next two years,” said Karen Andersen, Morningstar Healthcare Strategist. The company’s fair value estimate was raised to $330 from $305 after the news broke.

Gaming companies, including Melco Resorts and Entertainment (MLCO)Las Vegas Sands (LVS)and Wynn Resorts (WYNN) were on the rise following the announcement that China would allow tour groups to travel to Macau from the mainland.

Palantir Technologies (PLTR) shares rose after the US Department of Defense extended a contract with the company worth up to $229 million.

Oil prices soared, fueling gains in a number of energy stocks, including Weatherford International (WFRD)HF Sinclair (DINO)and Liberty Energy (LBRT).

Line chart showing the performance of some of the best performing stocks during the week of September 30, 2022.

Which stocks are down?

Carnival’s disappointing third quarter results (CCL) (CUK) led to a sale after the company missed profit and revenue estimates. The cruise line is also forecasting a loss for the fourth quarter. Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH) also fell.

CarMax (KMX) shares also plunged on missed second-quarter revenue and earnings expectations.

“Macroeconomic pressure from weak consumer confidence and inflation in many areas, as well as poor affordability of used vehicles, weighed on results,” said David Whiston, industrials strategist for Morningstar. .

Nike (NKE) the stock fell after short-term margin expectations were disappointed. Management said it would need to lower prices to eliminate excess off-season inventory.

Line chart showing some of the worst performing stocks during the week of September 30, 2022.

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