Resilient labor market boosts economic outlook

Labor market

Last Friday, the unemployment rate was reported at 4.10%, slightly lower than expected, and the prior month’s figure was 4.20%. Nonfarm payrolls also exceeded forecasts, rising to +254,000 compared to the projected +150,000 and the previous month’s +159,000. These stronger-than-expected labor market indicators led to an increase in equities and a rise in treasury yields, reflecting growing market confidence in the economy. At the press conference for the last September Federal Open Market Committee (FOMC) meeting, Powell mentioned that the Fed would keep a close eye on the labor market, as they did not welcome any additional cooling. By Friday morning, market expectations had shifted significantly, with a 90% probability priced in for a 25-basis-point rate cut at the upcoming November FOMC meeting and a 10% chance of no rate cut. This was a sharp contrast to just two weeks prior when the majority of the markets were anticipating a 50-basis-point cut.

Inflation and current events

Last Tuesday, about 45,000 dockworkers and longshoremen in the East and Gulf Coast ports started striking, in calls for increased compensation and protections against rising technological advancements and the risk they present to job security and compensation. Markets were concerned about the risks of increased prices and inflation should the strike continue for an extended period. However, as of Thursday evening, the dockworkers of the International Longshoremen’s Association and the United States Maritime Alliance, Ltd. reached a tentative agreement to reconsider wages and extend the contract to January 2025. Consequently, concerns of supply chain issues and inflation were put at bay. As uncertainty grows and market volatility persists, companies may want to consider entering into interest rate swaps or caps to manage interest rate risk.

Commodities and current events

Last week, conflicts in the Middle East escalated as Iran launched more than 180 missiles at Israel, as Israel expanded its invasion into Lebanon, impacting oil markets. By Friday, Brent crude futures reached $77.43 a barrel at closing, which was nearly a 12% increase from September’s low. Prices are expected to continue to rise if Middle East conflicts continue to escalate, as speculations that Iran’s oil infrastructure is at risk of a retaliatory attack have risen. In the case that Iran’s oil infrastructure is attacked, considering that Iran is the seventh largest oil producer, the world’s oil supply would decrease significantly and significantly increase oil prices. Since 2022, the reaction in oil markets has reportedly been muted. Strategists have claimed that the outcome of the Middle East conflict would be far more concerning compared with the impact on oil markets from the 2022 Russian-Ukraine conflict, as there are far more oil imports/exports in the Middle East area, namely the Straits of Hormuz, where 30% of the world’s oil consumption is handled.

The week ahead

Next week’s economic release will highlight CPI, scheduled for release on October 10, and preliminary consumer sentiment, scheduled for release on October 11.