The futures markets suggest a strongly positive open to today’s trading. Prior to the bell, the U.S. Bureau of Labor Statistics reported very favorable nonfarm payroll additions of 254,000 for the month of September. That compared to economists’ conservative estimate of 150,000 and the revised upward previous monthly gain of 159,000. The domestic unemployment rate slipped one-tenth of a percentage point to 4.1%. Hourly wages stepped up a solid 0.4% in September, versus the outlook for 0.3% growth; in August, wages also rose 0.4%. On a year-over-year basis, pay was up a quite respectable 4.0%, above the consensus expectation and the previous reading, both 3.8%. While, up to now, there had been signs of cooling, the jobs market is proving to be resilient.
As we write this report, New York Federal Reserve President John Williams is commenting on central bank policy and the general economic situation. At 10:00, his comments will be followed by those from Chicago Fed President Austan Goolsbee. We don’t expect any material deviation from recent Fed guidance that short-term interest rates will probably decline at about a 25-basis-point pace at each of the next few Federal Open Market Committee (FOMC) meetings. The FOMC is scheduled to meet this coming November and December. Assuming inflation remains tame, the federal funds rate, currently 4.75%-5.0%, could fall by as many as two points prior to the close of 2025.
Short-term interest rates, on a historical basis, remain elevated, even after the Fed’s one-half percentage-point cut in September. Mortgage rates have declined near the 6% mark, but likely will need to move lower before activity in the housing market meaningfully improves. The housing sector is a key driver of economic growth. Lower borrowing rates are good for businesses, especially those with variable-rate loans, common among small companies. Notably, in the struggling office real-estate market, many loans are due to turn over in the next couple of years. More-modest interest rates should lend some support to such borrowers’ finances. Elsewhere, at this time, a good number of domestic manufacturers have yet to take on additional debt to finance expansion. Managers want to see continued stability in consumer demand and the broader economy before investing in operations.
Importantly, the U.S. economy appears headed for a soft landing, without a recession taking hold. The improved odds of this occurring have lent support to stock prices. Even so, through Thursday’s close, stocks were having trouble posting gains this week. A few factors have weighed on valuations. Early in the week, lackluster numbers were released on the Chicago Purchasing Manufacturers Index, followed by soft manufacturing data from Standard & Poor’s and the Institute for Supply Management. The latest construction spending figure was tepid, as well. Also, jobless claims ticked a bit higher. Too, the commencement of a strike on the part of dock workers on the East and Gulf coasts prompted worries about potential supply-chain disruptions and the impact on inflation. (Fortunately, late yesterday, those workers decided to return to work, given a sweetened pay offer.) Furthermore, an expanded conflict in the Middle East, with Iran firing missiles at Israel as the latter’s troops engaged militiamen in Lebanon, strained investor sentiment on Wall Street.
Some positive factors, helping to limit share-price erosion this week, included expanded domestic job openings, better auto sales, good employment numbers from Automatic Data Processing (ADP), continued growth in the services sector, and China government authorities’ new efforts to stimulate the economy. Thanks to the latest employment data, it looks as if stocks will finish the week flat to up.
We believe the major domestic market indexes can achieve incremental gains to yearend. That assumes economic stability, subdued inflation, sustained favorable employment levels, and no substantial deterioration in the geopolitical situation. There remains a fair degree of uncertainty. Thus, investors would do well to focus on large-cap companies that are leaders in their respective markets. High-quality bonds and cash instruments also provide decent asset-preservation potential to individual portfolios. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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