Better than expected: U.S. October jobs report comes in strong

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Head of AIS Business Solutions Sophie Antal Gilbert discussed the latest U.S. Federal Reserve (the Fed) rate cut, third-quarter earnings season and the October U.S. employment report.

Fed cuts rates for the third time this year, but pause looks likely

Fresh off the heels of 25 basis-point rate cuts in July and September, the Fed lowered borrowing costs by another quarter of a percentage point on 30 October, dropping its benchmark rate to a target range of 1.50% to 1.75%. "The Fed has really been pushing back against the global economic slowdown driven by trade uncertainty between the U.S. and China," Eitelman remarked, "and with this latest cut, it’s clear the central bank now feels it’s provided enough accommodation to counter-balance these risks." Going forward, the hurdle for additional rate cuts is likely to be much higher, he said.

Eitelman and the team of Russell Investments strategists’ baseline view heading into 2020 is that the Fed will embark on a prolonged pause, leaving monetary policy unchanged for the next several months. However, if the central bank does decide to take action again, it will likely be to cut - rather than raise - rates, he said. This is because inflation remains relatively muted and generally below the Fed’s 2% target, Eitelman explained.

"Because there’s very little evidence of economic overheating or inflationary pressures, it’s difficult to envision the Fed raising rates any time soon," he stated. On the flip side, additional slowing in global growth could prompt a rate cut, Eitelman added. With uncertainty still on the table, he concluded by emphasising the important role that bonds can play today in diversifying multi-asset portfolios.

Q3 earnings season continues to beat expectations

Shifting gears to third-quarter earnings season, Eitelman said that with two-thirds of S&P 500 companies reporting, overall results have largely been better than feared. "Over 70% of companies are beating expectations, which is a bit better than normal," he stated. However, Eitelman cautioned that at a high level, the results are still fairly lacklustre.

"In the U.S., earnings growth is tracking somewhere between -1% and -3%, as companies continue to struggle against a backdrop of weakening revenue growth as well as sluggish economic growth," he said, adding that the same story is also playing out in Europe. Regardless, the fact that earnings growth continues to beat expectations has certainly helped drive markets upward over the past few weeks, Eitelman said. While the general consensus view among analysts is that earnings growth will re-accelerate in 2020, Eitelman and the team of strategists believe a slew of downside risks - such as continued trade uncertainty - may lead to more muted growth than expected in the year ahead.

The U.S. adds 128,000 jobs as unemployment rate stays low

On 30 October, the U.S. Commerce Department announced that GDP (gross domestic product) for the July-September period grew at a rate of 1.9%, year-over-year. This was indicative of continued strength in consumer spending as well as the housing market, Eitelman said. "The U.S. consumer continues to be backed by healthy wage gains and a strong labour market," he explained, "as further evidenced by the 128,000 jobs the nation added in October - versus consensus expectations of 75,000."

Both third-quarter GDP and the recently released October employment report point to a tale of two economies, he said: Manufacturing weakness versus consumer strength. Eitelman said that the October job gains were quite impressive, especially since roughly 50,000 jobs were likely lost due to the General Motors strike. "The October employment report, highlighted by a strengthening labour market and continued near-record low unemployment, shows that the story of a strong U.S. consumer may remain in place for a while," he concluded.

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