The US economy added only 29,000 jobs in September, far below economists’ expectation of 90,000 jobs. The US jobs report for September came in much weaker than expected, changing market expectations for the Federal Reserve’s October meeting.
Because a weaker labour market means the Fed has less immediate pressure to raise interest rates, investors welcomed the report. Because the labour market is no longer showing signs of overheating, the report gives the Fed more room to wait. Because people feel the cost of living is too high, on the other side, consumer confidence is falling. Because diesel is used heavily by trucks, transport companies, agriculture and other parts of the economy, high diesel prices matter. Higher diesel costs can therefore spread through the economy by making it more expensive to move goods and operate businesses.
The unemployment rate also increased to 4.2%. The S&P 500 gained on Friday after the report, although it still ended the week roughly where it had started. The previous University of Michigan reading showed sentiment falling to levels even worse than during the 2008 financial crisis. US diesel prices reached an all-time high of $6.41 per gallon on Wednesday, according to AAA. G7 leaders announced on Friday that they would release 100 million barrels of crude oil and diesel into the market over four months.
Husby and Egelhof said the economy and hiring can still remain healthy without the Fed having an urgent need to raise rates. The weak jobs number suggests that the US labour market is cooling rather than overheating. In simple terms, the jobs report makes an October rate hike less likely. These concerns show that Americans are feeling the impact of higher living costs even though the economy and spending remain relatively strong. This creates a mixed picture for investors and policymakers. On one side, people are still spending, jobs are still being added and the economy is still growing. The biggest concern is now diesel rather than crude oil alone. Diesel prices have also increased in Europe. That can eventually add to prices paid by consumers. The move is designed to reduce pressure on global energy markets. A softer CPI reading would give the Fed more reason to remain on hold. Meanwhile, record diesel prices could add fresh inflation pressure and make the CPI data even more important. In short, weak jobs have cooled rate-hike bets, but inflation — especially energy-related inflation — remains the key risk.
The next important consumer-confidence reading comes from the University of Michigan on Friday.
Because the labour market is still relatively healthy, while inflation remains a major concern, this is. The key issue for investors is therefore no longer just jobs. The emergency release is therefore an attempt to address the shortage of refined fuel and reduce pressure on diesel prices. Investors should therefore closely watch both CPI and diesel prices as they assess the next Fed move.
The market now sees only about a 20% chance of a 25-basis-point rate hike at the October Federal Open Market Committee meeting, according to CME data. The next major inflation reading will be US CPI data on October 14. The headline sentiment index is expected to fall to 48, from 48.1 previously. During the 2008 financial crisis, the index was generally around 55 to 60. Persian Gulf crude exports are now around 98% of their pre-war levels, according to JPMorgan Chase. Exports of diesel, gasoline and other refined products are around 3 million barrels per day, only about 58% of pre-war levels, according to JPMorgan Chase. The plan includes a substantial diesel release within 20 days, according to the G7 statement. The biggest test now is October 14 CPI.
BNP Paribas US economists Andrew Husby and James Egelhof said the report was not necessarily bad, but it was clearly not strong. They said the broader US job market is still moving in a positive direction, but hiring is gradually becoming weaker. JPMorgan chief US economist Michael Feroli said it would take a very strong CPI report to make the October Fed meeting a serious rate-hike meeting. Rick Rieder, BlackRock’s chief investment officer of global fixed income, said employment is currently the weaker part of the Fed’s data compared with inflation. The Conference Board said consumer confidence fell sharply in September.
The September report was a sharp change from the stronger labour-market performance seen in August. The weaker jobs report has reduced expectations for an interest-rate hike at the Fed’s October meeting. Economists expect CPI to play a bigger role than the jobs report in deciding what the Fed does next. So, October CPI could decide whether the Fed keeps rates unchanged or considers another hike. Feroli still expects another rate hike in December, assuming September and October inflation data show that core inflation remains sticky. Inflation is now in the driver’s seat. The Fed has two main goals: keeping prices stable and supporting maximum employment. However, he warned that this situation may not last forever. The Fed will continue watching both the labour market and inflation in the coming months. This means a weak jobs report does not permanently remove the possibility of future rate hikes. US consumer spending has mostly remained strong in recent months. A strong stock market has helped increase household wealth and supported spending. But Americans are becoming increasingly unhappy about the economy. Economists expect sentiment to weaken again. A further fall would show that Americans are becoming even more pessimistic about the economy. The data will be closely watched by investors, the Fed and the White House. Rising prices for goods, services, oil and gas are adding to that pressure. This means economic data can matter not only for the Fed and markets, but also for the political debate around the midterms. The global energy market has been under major pressure during the seven-month Iran war. Crude oil exports from the Persian Gulf have started to recover. But refined fuel exports have recovered much more slowly. This gap between recovering crude supplies and weak refined-product supplies is putting heavy pressure on fuel prices. The release is being led by G7 countries and their partners. The aim is to increase available fuel supplies and help bring down pressure on prices. The G7 announcement came after several days of pressure from the Trump White House. The US administration had pushed European countries to release oil products from their national reserves. The White House had threatened a US diesel export ban if European countries did not agree to release fuel from their own stockpiles. Record diesel prices could become an important inflation problem even if crude oil exports continue recovering. Diesel directly affects transportation and the cost of moving goods. Higher transportation costs can eventually feed into the prices Americans pay for products and services. That makes diesel prices especially important for the inflation outlook. If diesel prices stay extremely high, they could make the upcoming October CPI report more important for the Fed. The weak jobs report is pushing markets toward the view that the Fed can wait in October. Sticky inflation, however, could keep the possibility of future rate hikes alive. Falling consumer confidence is another warning sign for the economy. At the same time, strong stock-market performance has helped support household wealth and spending. This leaves investors with a mixed economic picture: cooler jobs, stubborn inflation risks, weaker consumer confidence and high energy costs. The economic calendar is relatively lighter after the major jobs report, leaving more room for company news and other developments to move markets. The September jobs report has made an October Fed rate hike much less likely. But the Fed’s decision is not settled yet. A very strong inflation report could bring the October rate-hike debate back.
Constellation Brands reports earnings on Tuesday. Applied Digital, a data-centre operator, reports on Wednesday and could provide another indication of how strong the AI-related investment trade remains. PepsiCo reports earnings on Thursday, giving investors another look at the food and beverage business. The University of Michigan consumer sentiment report on Friday is expected to attract major attention.
Average hourly earnings increased only 0.1% from August. Wages were up 3% from a year earlier, which is likely below the current inflation rate.
The economists described the current labour market as a “low hire, low fire” environment, meaning companies are not hiring many workers but are also not firing large numbers of employees. This means wage growth is not creating strong new pressure on inflation.
Its consumer confidence index dropped to 81.9 from 88.6 in August. The September reading was the lowest since 2014. Economists had expected the index to rise to around 89, making the actual result a major disappointment.
Dana Peterson, chief economist at The Conference Board, said consumers were mostly pessimistic about the economy in their written responses. Consumers increasingly mentioned high prices, expensive goods and services, and oil and gas prices. The weak consumer mood creates a difficult situation heading toward the US midterm elections. Americans are still spending and the economy is still growing, but many households do not feel financially comfortable. Affordability is expected to be a major issue for voters.
