Modest Disappointment Follows October Jobs Report

It isn’t often that a monthly gain of 261,000 new non-farm jobs is considered something of a disappointment, but that was the case with the labor market’s performance in October. Due to the distorting impact of recent hurricanes on September’s jobs report, the Bloomberg consensus forecast had called for a rebound-driven gain of 313,000 new jobs. The revision of September’s initially-reported 18,000 loss to a gain of 33,000 essentially closed the gap between the forecast and the actual result, but the headline total fell short of expectations.

Given the weather-related noise in the data, the more meaningful three-month average gain rose to a healthy 162,000. But the decline in year-over-year average hourly earnings to 2.4 percent from a revised 2.8 percent in September added to the sense of modest disappointment. It’s worth noting that the wage data itself was likely distorted by the hurricanes. On a positive note, the unemployment rate fell to 4.1 percent, its lowest since December, 2000.

Changes underway at the Fed

There was little immediate reaction in the bond market to the jobs report on Friday, but yields did fall slightly by day’s end following the widely-anticipated announcement of the president’s nomination of Jerome Powell to succeed Janet Yellen at the Fed. Perceived as likely to continue Yellen’s measured removal of accommodation, as well as sympathetic to some loosening of financial regulation, Powell’s nomination is considered to be less disruptive for markets than other contenders for the job.

However, the yield curve did continue to flatten. The spread between the two-year treasury note yield and that of the ten-year fell to 72 basis points, the tightest since November, 2007. And there are more changes to come at the Fed, with reports that New York Federal Reserve president Dudley is expected to announce his retirement. Earlier in the week the Federal Open Markets Committee chose to leave rates unchanged, but did nothing to dissuade the market from expecting another rate hike in December.

Earlier in the week the headline Personal Consumption Expenditure (PCE) deflator for September climbed to 1.6 percent from the 1.4 percent level that had persisted since June. The year-over-year core rate remained at a subdued 1.3 percent, just fractionally above its lowest point in the past five years. In contrast, the Federal Reserve Bank of New York’s underlying inflation gauge for September, released several weeks ago, registered a reading of 2.8 percent.

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