Could September’s disappointing U.S. jobs report alter the Fed’s tapering timeline?

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Laura Bardewyck discussed the September U.S. employment report and whether it could impact the U.S. Federal Reserve (the Fed)'s plans for scaling back asset purchases. They also provided an update on the U.S. debt-ceiling saga and chatted about soaring energy prices in Europe.

September slump: U.S. nonfarm payrolls miss expectations

Recently released data from the Labour Department showed that the U.S. economy added just 194,000 jobs during September - falling significantly short of consensus expectations for 340,000 new nonfarm payrolls. Ristuben characterised the number as disappointing, noting that many analysts had expected that the expiration of extended federal unemployment benefits early last month - combined with the widespread reopening of schools across the country - would prompt more individuals to re-enter the workforce.

"The leisure and hospitality industry did experience a modest uptick in job growth in September - albeit nothing compared to the strong gains from earlier in the year - while government jobs in education declined by around 140,000," Ristuben stated. The slower pace of job gains in places like bars, restaurants and hotels was probably due to the spread of the delta variant of the coronavirus, he said, noting that infections were near peak levels at the time the survey was conducted. The decrease in public education jobs, on the other hand, may be partly due to seasonable adjustments in the data, Ristuben stated, noting that government-job numbers can be fairly volatile for this very reason.

Of perhaps greater significance, the September report also showed that wage pressures are continuing to build, he said, explaining that average hourly wages increased 0.6% from August - and 4.6% on a year-over-year basis. "This is the sixth straight month we've seen wage growth in the monthly jobs reports running a little hot," Ristuben remarked, noting that the Atlanta Fed's wage growth tracker has been capturing a similar trend.

Ultimately, Ristuben believes that these strong wage-growth numbers are likely to garner more attention from the Fed than the weaker job-growth numbers, especially since Chairman Jerome Powell indicated at a 22 September press conference that he thinks substantial further progress toward full employment has probably already been met. "This leads me to believe that the Fed will still announce a timeline on tapering at its 2-3 November meeting," he said, noting that the current waning in COVID-19 infections also suggests that October's job gains could be stronger. While the October report will not be released until after the Fed's next policy meeting, Ristuben expects that the rise in wage growth over the last several months will be enough of a factor for the central bank to stick to its tapering timeline.

The U.S. debt-ceiling deal: Kicking the can down the road - but not very far

In a substantial development, the U.S. Senate authorised a temporary extension of the debt ceiling on 7 October, Ristuben said, with lawmakers agreeing to raise the federal borrowing limit by $480 billion through 3 December. The House of Representatives still needs to ratify the measure, he added, with approval expected on 12 October.

"This latest agreement essentially allows lawmakers to kick the can down the road again - but not very far," Ristuben remarked, "as this issue will have to be addressed again in less than two months." At this point, it's quite clear that Senator Minority Leader Mitch McConnell from the Republican Party thinks that the Democratic Party needs to solve the debt-ceiling issue through the budget-reconciliation process, he noted. While this may sound like a straightforward issue, Ristuben expects that the whole saga will rear its head again in mid-to-late November as the newest deadline approaches.

For now, though, the key takeaway is that the U.S. dodged a technical default on its debt for the first time ever, he stressed, noting that markets rebounded sharply on the news.

European natural gas prices soar. What's behind the increase?

Shifting gears to energy prices, Ristuben noted that costs have surged to record levels across much of Europe, particularly for natural gas. Part of the reason for the skyrocketing rise in prices is due to a limited supply from Russia, which is one of Western Europe's largest suppliers, Ristuben said. Russian President Vladimir Putin recently stated that the country will work to increase its supply to meet demands, he noted. Ristuben added that another factor pushing up prices is the cost of European Union (EU) carbon allowances, which are estimated to be responsible for about one-fifth of the increase. 

The longer-term takeaway from the region's energy crunch is that it will likely motivate EU leaders to move toward green-energy solutions sooner rather than later, he explained. "Already, governments in Europe are leading the charge on ESG (environmental, social and governance) initiatives, with the European Union recently pledging to achieve carbon neutrality by 2050. EU leaders have talked about being more aggressive when it comes to increasing the cost of consuming carbon - which would lead to higher energy prices for individuals - and how they're willing to bear that," Ristuben remarked.

Ultimately, European leaders appear fully committed to doubling-down on ESG initiatives, he concluded, noting that this could have significant implications for markets in five to 10 years.