Jobs Report Sparks Market Uncertainty: Rate Hike Expectations on the Rise

Bonds and Rates Take Center Stage in Investor Focus

• The mixed jobs report is sparking market volatility; interest rate hike expectations are rising as unemployment inches higher.
• Falling oil prices are affecting inflation; gas prices are dipping, but the dollar's strength may challenge earnings.
• Earnings season is beginning; Q3 profits aren expected to decline, and the spotlight is on forward-looking guidance amid the dollar's strength.

After fluctuation in the stock market yesterday, prices eventually settled with little change from the previous day—both the S&P 500 and Nasdaq Composite saw modest declines of just 0.1%. However, the calm may be short-lived because the release of the latest jobs report has the potential to set a new course for the market.

Economists had anticipated the economy would create 163,000 new jobs and that an unemployment would total 3.7%, Bloomberg reported. They also expected the Federal Reserve would maintain its current interest rates when it convenes in November, with a 64% chance of the same outcome in December.

However, the September jobs report brought a mix of news. While the number of new jobs exceeded expectations at 336,000, the unemployment rate saw a slight uptick to 3.8%. Following the report, expectations for a rate increase in both November and December saw a minor uptick as well. An intriguing aspect of the report was the revisions made to prior months, with this month seeing an upward revision to both July and August.

The immediate response to the report was a sharp decline in both the stock and bond markets. Nevertheless, beneath the headline numbers, there were subtle nuances worth noting. The labor force participation rate remained unchanged, and average hourly earnings were slightly lower than predicted. In terms of new jobs, the leisure and hospitality sector led the way, followed by the government. It's important to note the government job numbers may be somewhat inflated by teachers returning to work. This could potentially become a concern if a government shutdown occurs next month, which would likely impact government jobs.

While jobs data certainly holds sway over the Federal Reserve's decisions, another factor on its radar is commodity prices. Among all commodities, oil plays a pivotal role in determining inflation. After experiencing a strong rally since last summer, oil prices have recently pulled back significantly, with crude oil settling at $82.31 per barrel as of yesterday, marking a 14% drop in the past week. This drop in oil prices has also led to lower gasoline prices, with the average price per gallon now at $3.75, down from $3.83 just a week ago, according to AAA.

Looking forward, investors have their sights set on two major developments. First, earnings season is set to kick off in the coming week. Third-quarter profits are expected to decline by 0.3% year-over-year, as reported by Bloomberg. However, a recovery is projected for the fourth quarter, with communications and utilities sectors expected to lead the way. The strength of the U.S. dollar may pose a challenge for earnings, making forward-looking guidance a key focus during the upcoming earnings cycle.

Simultaneously, the possibility of a government shutdown next month adds a layer of uncertainty to the market. The short-term bill passed recently only keeps the government operational until next month. The situation is further complicated by the absence of a speaker in the House of Representatives, which hampers legislative processes. The longer it takes to elect a new speaker, the less time the House will have to vote on proposed spending bills.

Another noteworthy development is the narrowing of the trade deficit to a nearly three-year low. Often, a stronger dollar contributes to a widening trade deficit, as foreign products become more affordable to import. However, this deficit reduction may signal a potential pullback in consumer spending, which is worth monitoring as the holiday season approaches.

In addition to these macroeconomic factors, several individual stocks have made headlines. General Motors faces a potential recall affecting over 20 million cars due to airbag issues. Amazon is making moves in the grocery shopping space, offering free delivery on orders over $100 for Prime subscribers. Tesla has once again lowered prices, this time by approximately $2,000 on the Model 3 and Model Y. Lastly, Exxon Mobil has announced its acquisition of Pioneer Natural Resources, causing Pioneer's shares to surge by almost 10% in premarket trading.

Finally, the realm of bonds and interest rates, which had been relatively dormant for over a decade, is now central to investor decisions. The rise in rates this year has led to a new landscape where the stock market and bonds move in tandem. For those under the age of 45, this is a novel experience as they've never witnessed a market where interest rates are on the rise. Given this shift, guidance on the relationship between bonds, interest rates and the stock market will be offered on tastylive.com, commencing next Monday.

In conclusion, the financial landscape remains dynamic and multifaceted. It's crucial for investors to remain attuned to these developments while adhering to their investment plans and long-term objectives. While short-term turbulence may create uncertainties, it can also present opportunities for discerning investors.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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