Too Weak to Hike, Too Firm to Cut

• ADP data showed businesses added 90,000 jobs in September.

• JOLTS figures showed job openings barely edged out the number of unemployed.

• Friday's 29,000 payroll gain raises the stakes for the Fed's October decision.

The labor market isn’t collapsing. It’s crawling...

Earlier this year, I laid out how I see the labor market taking shape. I walked through the forward-looking indicators I track to handicap each month's payroll report. One of those is the combined hiring gauge from the regional Federal Reserve manufacturing and services surveys shown below. It surged off the 2020 COVID-scare floor and peaked during the hiring rebound that followed in 2021.

But it's been grinding lower ever since, dipping negative more than once along the way. It caught a brief second wind over the summer before rolling back down again. That pattern has tracked the labor market's broader loss of momentum almost step for step.

That's why last week was an important tell from a monetary policy perspective. Hiring data from the U.S. Bureau of Labor Statistics ("BLS") and payroll processor ADP came in weak by historical standards. That extended a trend that's been playing out for the last couple of years. Hiring stuck in a low gear should give the Fed reason to stay on hold at its October meeting, even with oil prices climbing. That would underpin a steady rally in the S&P 500 Index.

But don't take my word for it, let's look at what the data's telling us...

The BLS Job Openings and Labor Turnover Survey ("JOLTS") showed available positions fell to less than 7.1 million in August, from more than 7.3 million in July. That's a drop of roughly 5.2 million from the March 2022 peak of 12.3 million.

The more telling metric, though, is how openings stack up against the number of unemployed workers:

• The ratio tells us whether the job market is tightening or loosening.

• Tightening means workers are harder to find, which drives up wages.

• Loosening means more people are looking for work, which keeps a lid on pay.

In August, just over 7 million people were unemployed against just under 7.1 million openings. That's roughly 1 opening per job seeker, down from July's 1.06 and well below the five-year average of 1.3. The ratio has hovered around this level for close to two years and now sits near pre-COVID norms. In other words, the market has loosened, and that takes wage pressure off the table...

Employee turnover is also slowing. The quits rate held at 1.9% in August, matching its lowest level outside the pandemic period. Workers aren't quitting because they're not confident they can find something better.

ADP's September hiring data told a similar story. The firm estimates companies added just 90,000 workers last month.

• That was an improvement from the 36,000 gain in August.

• Yet it's well below the typical September gain of 185,000 since 2011.

• It marks the 16th consecutive month of below-average hiring.

Friday's nonfarm payroll report was even weaker. The BLS estimates employers added just 29,000 jobs in September.

• That was a sharp drop from August's downwardly revised gain of 133,000.

• It was much weaker than the typical September gain of 189,000.

• Employers have added 612,000 jobs year-to-date, compared with the 2.1 million average since 2015.

And the revisions made it worse. August's gain was first reported at 162,000 before being cut to 133,000. July was the bigger deal: it was revised to a loss of 10,000 from a gain of 21,000. That means every month this year has come in weaker than average...

And while a 4.2% unemployment rate may look healthy, it's not the good news it seems. Labor force participation is hovering around its lowest levels of the last 20 years. In other words, low unemployment likely reflects people dropping out of the workforce, not finding jobs.

These signals matter because they shape how the Fed responds. Recent oil price gains tied to the Iran conflict have traders debating whether the Fed's next move might be a hike, not a cut. With fewer people looking for work, the economy doesn't need to add as many jobs each month to keep unemployment steady, which is why a 29,000 print isn't the alarm bell it would have been a few years ago. But the data is weak enough to keep a hike off the table, and not soft enough to force a cut with oil-driven inflation risk still in the picture.

Bottom line: look for the Fed to stay on hold when the rate-setting Federal Open Market Committee ("FOMC") meets later this month. A hold removes uncertainty in either direction and, combined with resilient corporate earnings, should underpin a steady rally in the S&P 500 Index.

Five Stories Moving the Market:

Federal Reserve Bank of Cleveland President Beth Hammack said that the September U.S. employment report fits with ​the recent trend of hiring, noting she has time before ‌she has to make a decision on what is next for monetary policy – Reuters. (Why you should care – the biggest policy hawk is striking a more dovish tone on rate hikes)

The Federal Reserve and European Central Bank will release minutes of their meetings last month at which they raised benchmark rates, bowing to concerns about mounting inflationary pressures; the transcripts could reveal that many policymakers were deeply worried about underlying price trends – Bloomberg. (Why you should care – the commentary will give Wall Street a sense of whether policymakers intend to raise interest rates again this year)

The Trump administration’s talks with Russia about ending the war in Ukraine have expanded to include a multibillion-dollar oil deal; the deal, which is contingent on approval from the U.S. government and the Kremlin, is for a sprawling set of oil fields, refineries and gas stations around the world owned by Lukoil, one of Russia’s biggest energy companies – NY Times. (Why you should care – the deal could allow Lukoil to avoid U.S. government sanctions, potentially boosting global energy supplies in the process)

Iran's Parliament Speaker Mohammad Baqer Qalibaf said the Strait of ​Hormuz will not reopen until seven Iranian conditions set out in a June interim agreement with the US ‌are met; the demands are said to outline a seven-day period of trust-building aimed at returning the two sides to an enhanced version of the memorandum of understanding agreed in June – Reuters. (Why you should care – the two sides continue to negotiate through Qatari mediators)

The U.K. is preparing to impose levies on the import of Chinese electric vehicles, meeting a key demand from the European Union, according to the Times of London; the EU has made clear that the UK faces being cut from the Made in Europe scheme if it doesn’t act on the tariffs – Bloomberg. (Why you should care – developed nations are increasingly going after China’s tactic of overwhelming countries with exports)

Economic Calendar:

Markets in China and South Korea are Closed

Japan - Household Confidence for September (1 a.m.)

ECB’s Nagel (Germany) Speaks (3:45 a.m.)

Eurozone - HCOB Eurozone Services and Composite PMI (Preliminary) for September (4 a.m.)

ECB's Lane (Chief Economist) Speaks (4 a.m.)

U.K. - S&P Global U.K. Services and Composite PMI (Preliminary) for September (4:30 a.m.)

Eurozone - Sentix Investor Confidence for October (4:30 a.m.)

ECB's Schnabel (Executive Board Member) Speaks (5 a.m.)

U.S. - S&P Global U.S. Services and Composite PMI (Preliminary) for September (9:45 a.m.)

U.S. - ISM Services PMI for September (10 a.m.)

U.S. - Conference Board Employment Trends Index for September (10 a.m.)

Treasury Auctions $95 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $82 Billion in 26-Week Bills (11:30 a.m.)