LIVE MARKETS-Playing it cool: Weak jobs report dampens rate hike odds

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PLAYING IT COOL: WEAK JOBS REPORT DAMPENS RATE HIKE ODDS

The September employment report fell a mile short of expectations.

And markets are eating it up.

The US economy added 29,000 jobs last month, less than one-third the 90,000 consensus.

On top of that, August payrolls were downwardly revised by 17.9% to 133,000 and July's originally reported gain of 21,000 was restated as a loss of 10,000 jobs. In total, that's a 60,000-job downgrade.

This marks the eighth downside surprise in the past 12 months, and the eighth reading to print below the 100,000 level over the same period.

Below the headline, the 28,000 increase in the often lower-wage services sector was responsible for 60.9% of the 46,000 private-sector job additions, a smaller-than-usual share. Goods-producing and construction sectors added 18,000 and 11,000 jobs, respectively. The manufacturing sector added 11,000 workers, versus the 10,000 expected.

Government payrolls shrank by 17,000, stunting the headline number.

In view of the apparent weakness, financial markets are currently baking in 16.1% likelihood of a rate hike at the conclusion of the Fed's October meeting, down from 26.0% just prior to the release, and from 64.2% just a week ago, according to CME's FedWatch tool.

"A dovish employment report in every way, soft headline, large downward revisions to prior months, uptick in the unemployment rate, and softer than expected wage growth with incomes now failing to keep up with the rate of inflation," writes Stephen Coltman, head of macro at 21shares. "The employment side of the mandate has barely been part of the conversation at recent FOMC meetings, but maybe that will begin to change after this report."

The "softer than expected wage growth" mentioned by Mr. Coltman gave markets their first glimpse of September inflation. That data showed average hourly wages decelerating, eking out a 0.1% monthly increase, slower than the 0.3% consensus. Year-on-year, wage growth unexpectedly cooled to 3.0% from 3.1%. Economists predicted annual wage growth of 3.2%.

"(The report) suggests that the Fed doesn't have to worry about wage inflation," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters. "Along with the cooler-than-expected PCE price index that we got the other day ... the Fed could likely remain on hold at the October meeting."

Annual wage growth is cooler than the most recent 3.4% CPI reading. That means real wage growth remains in negative territory, and has been since April. That bodes ill for consumers, who carry about 70% of the US economy on their shoulders.

Elsewhere in the report, the uptick in the labor market participation rate — to 61.8% from 61.6% — is a step in the right direction, and is likely at least partially responsible for the uptick in the unemployment rate USUNR=ECI, to 4.2%.

Increasing participation puts upward pressure on the jobless rate; when workers are on the sidelines, they're not considered unemployed.

"The unemployment rate ticked up slightly, but for the right reasons as both labor force participation and employment increased," says Elise Gould, senior economist at the Economic Policy Institute.

But lest we get too excited, despite the uptick, labor market participation still very low by historical standards.

The average unemployment duration pulled back to 25.4 weeks from August's 26.1. That volatile metric has been zig-zagging higher for about two years, and corresponds with the general downward trend of jobs confidence reflected in consumer survey data.

Broken down by race and ethnicity, joblessness among White workers inched lower, to 3.6% from 3.7%, well below the national average. Unemployment among those who identify as Hispanic eased to 4.7%, while Asian unemployment dropped to 2.9%.

However, the jobless rate among Black workers jumped one full percentage point, to 7.0%.

Taken together, the White/Black jobless gap widened to 3.4 pps, from 2.3 pps a month ago.

It should be noted that the Black labor force contracted by about 288,000 in the January to August period, according to the Joint Center for Political and Economic Studies.

(Stephen Culp)

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