The Jobs Report Threw Us a Curveball?

In this episode, Senior Economist Jose Torres and Chief Strategist Steve Sosnick break down the unexpected strength in the U.S. labor market, the implications for interest rates, and the global impact of economic data. They also explore stock market reactions, Middle East tensions, and China’s stimulus measures, providing valuable insights for investors navigating today’s complex financial landscape.

Summary – IBKR Podcasts Ep. 196

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome everybody to this week’s edition from Interactive Brokers. Joining me to discuss the market impact of recent economic data, Senior Economist, Jose Torres. Welcome, Jose. 

Jose Torres 

Hello, Andrew. Hello, everyone. 

Andrew Wilkinson 

And Interactive Brokers Chief Strategist, Steve Sosnick. 

So let’s start with Jose. You’d expected a softening in the labor market for September but instead the non-farm payroll reading blasted through everybody’s expectations. 

Can you explain the strength of the report to the audience Jose? 

Jose Torres 

Sure. The pace of hiring accelerated for its third consecutive month to its loftiest level since March. Job growth came in at 254,000, exceeding projections of 140,000. Looking under the hood, revisions were also upgraded. The past two months, July and August, will revise upward. 

The unemployment rate ticked down to 4.1%. Wage pressures stayed hot at 0.4%. As far as sectors though, we still had a non-cyclical tilt with education, health services, and government make comprising roughly 45% of the total. There was also a lot of concentrated progress in the leisure and hospitality sector. That sector added almost 80,000 jobs. Also has help from construction. 

But outside of those four, job growth was pretty tempered and consistent with what we’ve been seeing in other surveys. Corporates overall, they don’t want to hire that much, but they’re also not letting go of labor either. Against the backdrop, interest rates rose significantly and fed easing expectations also were subdued. Folks were expecting another supersized 50 basis point reduction from the Fed again, perhaps in November or December, but that seems to be off the cards for now. 

Andrew Wilkinson 

Steve, firm economic data and throw in there a downwards glide for inflationary pressures that Jose just hinted at. That’s got to be a win for the stock market. What’s your take on global markets at this point? 

Steve Sosnick 

If all comes to pass, that certainly is a good glide path. I don’t know that we can be so quick to just dismiss the stable prices portion, because if wages continue to increase faster than expected, 0.4 annualizes to well above the 2% inflation target. 

I don’t know that the Fed can necessarily declare a victory on the stable prices portion of the mandate. Nor can they focus too heavily on the maximum employment portion of the mandate. But to be blunt, none of it matters to stock investors right now. 

They don’t care. Good economy? Good for stocks. Rate cuts? Good for stocks. Martians land on earth? Good for stocks somehow. It really doesn’t matter because the mindset is every dip should be bought and every rally should be chased and every trend should be followed. 

I’m obviously being a bit facetious there, and so if you’re reading the transcript understand there’s a little bit of sarcasm in that, but bottom line is investor psychology in stocks remains very strong, at least as we’re taping this Monday. This could all change after we get PPI and CPI later this week, after earnings season starts on Friday, semi officially with J.P. Morgan. 

I’ll be looking for what the guidance is because a lot of good news is priced into stocks for those who are disappointed that 50 basis points seems to be off the table for now, realize that double digit earnings growth is priced in for 2025. 

And so we need the companies to reaffirm their guidance. It no longer really matters too much if companies beat their estimates. It’s a necessary condition, but hardly a sufficient condition in an era where 75 to 80% of companies routinely beat their earnings estimates. 

So the question then is investors are looking to the future, as well they should be. And it’ll be crucial to hear whether the company’s guidance reflects the better economic tone that at least seemed to emerge last week.  

Andrew Wilkinson 

So, Jose, on the one hand, things are very much going in the way of Powell and his colleagues at the Federal Reserve. And that includes resolution of the dock workers strike last week. But then, there’s the tension in the Middle East and that’s really a huge worry that stocks blow off a little bit. How much should U.S. investors fear an escalation of such conflict in the Middle East? 

Jose Torres 

I think it’s an important consideration. You have an election going on right around the corner. You also have oil prices up significantly up to around $75.00. They were about $65.00 a few weeks ago. That’s also contributing to higher interest rates, particularly on the long end. In fact, folks were really surprised. 

Folks from realtor offices, from automobile dealerships, they called me after the Fed’s 50-basis point supersized reduction, and they were concerned that the rates that they’re working with haven’t come down. And that’s really what’s been going on in the long end, protesting the 50-basis point reduction by the Fed. 

And alluding to what Steve said earlier, perhaps thinking that the Fed is too complacent on its inflation mandate. Former Chair Bernanke used to talk about how oil price shocks are nightmares for monetary policy, for monetary policy officials. So if you do get an escalation in hostilities, particularly as it relates to nuclear facilities as well as oil supplies, you could see oil up to $85.00-90.00 and that would totally change the playbook for equity investors because all of a sudden now, inflation is not going to be at a two handle, it’s going to be at a three handle. And then your month over month changes start to go back to 40 bps month over month, 50 bps month over month. 

Of course, this is a worse-case scenario but, pressures are high, and if that does come around, then valuations do come into question. Because if you have a ten year, at 4.5 or 5%, it’s tougher to dance than if it’s between 3.5 and 4%.  

Final point here is if you look at bank reserves, they’re down a lot, lowest they’ve been in since 2023. 

And then if you look at the Fed’s balance sheet, lowest it’s been since May of 2020. So liquidity conditions, it’s one of those things, they don’t matter until they do. And it could start to matter in the next few weeks. 

Andrew Wilkinson 

Let’s move on to the Far East now, Steve. There’s been a lot of activity in China from the government and the monetary officials there that’s sparked a big rally for Chinese stocks. What’s your take on that? Are things maybe overdone a little bit? 

Steve Sosnick

To some extent, I am fearful of that. And I guess the thing to keep in mind was the measures that were taken and I laid them out in a Traders’ Insight piece last week. And I urge you all, if you’re curious to see what they did, I just put them all basically in a list in one of the pieces I wrote. 

It’s a lot of stimulus and stocks were correct to jump on that news. The issue is though, was 25% up in a week perhaps a bit much? And I do think probably yes. The reason being it was golden week since then. They did all this stimulus and then basically took a weeklong holiday. 

So I do believe there was a certain amount of panic buying, window dressing, short covering, all that pushed the rally up, maybe a bit more than warranted. A rally was warranted. I don’t know that 25% in a week was warranted. So I have to think partly as an investor, partly as a trader here. 

The investor in me says, great. And I think from a global point of view, since I always prefer to root for a stronger global economy than an economy that requires massive rate cuts, a stronger China is helpful to that. On the other hand, the trader in me says that’s a long way in a short period of time with some very specific seasonal factors. 

And we did see client activity really pick up in Chinese names. Although I will note that it was largely two-sided and our customers were trading around it, at least in the very, very limited data that I see in terms of customer activity.  

So this was not necessarily everybody jump into the pool, at least internationally. I think a lot of it was domestic. I think a lot of it was timing considerations. Overall, I’m going to throw it over to Jose for one sec, the Chinese economy seemed to be really sinking into the role of basket case. 

And just as the Chinese economy basically helped us out of the global financial crisis with their growth. I worry that a retrograde Chinese economy could do the opposite going forward for the coming years. 

Do you agree that we need a healthy China and what they did was warranted, or maybe just a little bit of a Band-Aid on a huge problem? 

Jose Torres 

Well, Steve, I think that part of it was they were jealous that equities all around the world were rallying so much, and one thing that the Chinese love to do is they like to differentiate themselves from everyone else. So if everyone else is easing, they’re not easing. 

If everyone else is tightening, then now they’re easing. So I think they had the fear of missing out on the upside in stocks by not enacting a lot of stimulus. As far as their economics, they’re in a really weak spot right now because for ages they depended on the U. S. and the EU to import their exports, right? It’s an export-oriented economy.  

The best thing they do is manufacture things cheaply and send it to other places. So now that the two largest purchasers are looking for other suppliers in the U.S., now we have Mexico as our top importer, they’re stuck twiddling with their thumbs and they’re having some trouble. 

Against that backdrop, a lot of leverage in the economy. A lot of real estate construction. So I’m afraid that they’re not in a good spot. As far as how long the rally could last, Steve, you’re probably going to know a lot more than me about that, but it is a synchronized easing cycle all around the world. 

Everyone’s easing and we know here in the U. S. how much stimulus can help risk assets. 

Andrew Wilkinson 

Very good. Steve Sosnick and Jose Torres, thank you very much for joining me. 

Steve Sosnick 

Thanks, Andrew. 

Jose Torres 

Thanks, Andrew. Thanks, Steve. See you next time. 

Andrew Wilkinson 

And remember to rate our recent episodes wherever you download your podcasts from. Speak to you soon.  

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