The main event of the first trading week of the month triggered sharp moves in financial markets. After rallying at the start of the previous week, US stocks gave back most of their gains.
Moreover, the US dollar reversed too and closed yesterday at its weekly highs. Speaking of the US dollar, it moves in an inversed relationship with the stock market.
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More precisely, a declining stock market triggers a rally for the US dollar. Consequently, a rally in the US stock market triggers a weaker US dollar.
The explanation comes from the market’s expectations about what the Fed will do next. Much of the previous week’s talk was about the imminent Fed’s pivot. By pivoting from its tightening cycle, the Fed would create conditions for stocks to rally and the dollar to weaken.
As such, most of the attention this past trading week was about the September jobs report. A softer job market would have brought the Fed closer to the pivot, so the stocks should have rallied, and the dollar should have weakened.
But exactly the opposite happened. So was the September NFP report solid enough to justify the market’s reaction?
Here are two reasons to fade the market’s reaction to the report:
- The US labor market is cooling
- Moderate growth for hourly earnings
Despite the positive headline, the US labor market is cooling
The US economy added 263k new jobs in September, more than the market expected. As a result, stocks tanked, and the dollar rallied, as the market believed that the Fed would stay on course with tightening financial conditions.
But despite the positive headline, the US labor market is cooling, albeit at a slow pace. For instance, the September payrolls gain of 263k is the lowest since April 2021.
Moderate growth for hourly earnings
Any trader should know that the Fed has a dual mandate – creating jobs and maintaining price stability. Hence, besides the jobs data, traders should also pay attention to the inflation data.
Inflation is out of control in most advanced economies. It sits at four decades high in the United States, with no signs of cooling down.
Yet, yesterday’s NFP report showed a promising sign for inflation to peak. More precisely, average hourly earnings rose below the pace of the prior three months – the softest reading since December 2021.
Sure enough, the market focused on the headline. But a close look at the details in the September NFP report gives enough reasons to fade the market reaction.
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