U.S. labor resilience continues despite congressional instability, higher rates, and global conflict

Resilient labor force

The job openings and labor turnover summary, released Tuesday, showed job openings jumped to 9.61 million in August, up from a revised 8.92 million openings in July. The market predicted job openings were going to fall to 8.82 million. Over 70% of the increase was attributed to additional job openings in professional business services alone. Notably, broad declines were seen throughout many of the other categories including construction, trade, transportation, utilities, information, real estate, leisure, hospitality, and food services. Additionally, the quits rate, or those voluntarily leaving their jobs, held steady at 2.3%. The steady rate, which is now aligned to where we were pre-pandemic, implies workers are no longer as confident in finding better jobs elsewhere.

The employment situation summary, released Friday, showed 336,000 jobs were added in September. This figure was well above the 170,000-market expectation for September and the revised 227,000 added jobs in August. The survey consists of both a household survey and an establishment (business) survey, and this month the two were quite different. In the household survey, there was relatively no change from the prior month and the unemployment rate derived from the household survey remained unchanged at 3.8%. However, the establishment survey, from which jobs added is derived, showed broad job growth. Private education and health services, leisure and hospitality, and government accounted for over 70% of the increase in jobs, with most other sectors relatively flat. No sector had significant job losses. In response to strong labor demand, average hourly earnings increased by 0.2% month-over-month and 4.2% year-over-year.

The House of Representatives ousts Kevin McCarthy

As detailed in last week’s update, a small number of house Republicans felt betrayed by their previously elected leader, Speaker Kevin McCarthy. Last week, for the first time in U.S. history, eight Republicans, led by Representative Matt Gaetz, joined all 208 Democrats to remove the speaker. The house is expected to reconvene today and have a vote on Wednesday to elect a new speaker. There is no guarantee that one will be elected by the end of next week due to the existing fractions within the legislative body. Until a new speaker can be elected, legislative work around the fiscal budget has been delayed.

Rates rise in response to economic resilience and political instability

The market broadly interpreted the strong labor reports as potential inflationary contributors, which could lead to the Federal Reserve keeping rates higher for longer. Likewise, the instability displayed by Congress this week is presumably increasing the risk premium associated with Treasury yields. Although harder to quantify, if investors have less faith in the ability of Congress to effectively govern, keep the government functioning, and repay debts, they will demand a higher yield to compensate for the additional risk. The U.S. fiscal budget cannot be addressed until a new speaker is elected in the House of Representatives, which could cause a government shutdown on November 17. The continued threat of a government shutdown and the broader use of government shutdowns and default as bargaining chips in the U.S. political system could also prompt a downgrade of U.S. credit, which was detailed further in last week’s newsletter.

As a result of last week’s events, yields across all Treasurys increased. The 10-year hit its highest intraday level since 2007 on Friday at 4.885% before settling to 4.801% to close the day. As markets adjust to a “higher for longer” mindset in rates and add in any potential risk premium, which should be larger for longer-dated Treasurys, longer-term Treasurys have rallied faster than short-term Treasurys. The yield curve inversion between the 10-year Treasury and 2-year Treasury has fallen, as a result, to 29.98 basis points, its smallest inversion since October 24, 2022.

Oil prices rise and treasuries fall in the aftermath of the Hamas attack on Israel

After following a few weeks of declines, Brent crude oil rose more than $3.57, or 4.2%, a barrel on Monday relative to Friday's close. Meanwhile, as investors across the world took flight to safe-haven assets, yields on the 10-year Treasury fell 17 basis points to 4.630% as of Tuesday morning relative to their close on Friday of 4.801%. The rapid change in rates on Monday further highlights the persistent volatility we have been experiencing in the 10-year Treasury. Given the potential for prolonged conflict between Hamas and Israel, volatility could be persistent.

Looking forward

For corporations, the rapidly increasing 10-year Treasury rate makes pre-issuance hedging an important topic for consideration. On Friday alone, the 10-year Treasury swung 18 basis points intraday and closed the week 20 basis points higher relative to Friday, September 29. For corporates with existing floating rate debt, the continued labor and economic resilience in the U.S. could prompt the Federal Reserve to continue raising interest rates higher than the market expects. Governor Michelle Bowman stated last week, “I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target.” Although she is just one voice of many within the Federal Reserve, her remarks show at least one member is suggesting more than one more additional rate hike may be needed. That, in combination with an immediate cash-flow pickup, makes swapping floating-rate debt to fixed-rate debt a valuable conversation to have. It is worth noting that the cash-flow pickup is shrinking due to the normalization of the yield curve, but remains present. For perspective on 1-month Term SOFR, at Friday’s close a 5-year fixed rate swap was 4.427% compared to the overnight fixing of 5.341%.

It will also be important for market participants to continue to monitor impacts from the Israel-Hamas war. There is a potential that if the conflict worsens, oil prices could continue to climb and energy inflation could increase globally. Meanwhile, there could also be a general flight to safety, which could put downward pressure on Treasury yields in the U.S. at the same time potential inflationary pressures put upward pressure on yields. The net result will be difficult to predict, but volatility will likely continue.

In the immediate week ahead, look for key updates on inflation from both the producer price index on Wednesday and the consumer price index on Thursday. The University of Michigan’s consumer sentiment index is also released on Friday. Outside of economic publications, the world will continue to watch the speaker elections in the House of Representatives and the developments in the Israel-Hamas war.