The September jobs report on Friday put to rest any fears that the labor market might be on a path to cool enough to endanger U.S. economic growth. On the contrary, the report was so broadly strong as to give rise to worries that the Federal Reserve might pause further cuts and reignited wage growth might be a looming danger.

Employment grew by 254,000 nonfarm jobs, which was well above expectations, and the upwardly revised 159,000 in August. The household survey data was also robust at a gain of 430,000 jobs, with the research series, which mirrors the payroll report criteria, soaring by a whopping 666,000.

The unemployment rate was reported at 4.1% but was close to 4.0% at 4.05%, down from 4.2%.

Wages crept up to 4.0% year-over-year, above the expectations of 3.8%, which reinforces the strength of the labor demand but might raise questions about renewed inflation pressures. The only blemish on the jobs report was the average workweek hours falling to 34.2, a four-year low also seen in July and January.

The high-frequency initial and continuing filings for unemployment benefits confirm that the cooling trend in the labor market has stabilized, with both measures off their respective peaks.

Before the recent decline, the unemployment rate had risen enough off the lows to trigger the Sahm Rule, which has an unblemished track record of forecasting recession. However, there are several reasons to believe that the Sahm Rule might be overstating the risk of recession during this cycle.

Monitoring the prime-age, 25 to 54 years old, employment-to-population ratio should help signal when concern about the rising unemployment rate is warranted. The rising prime-age employment-to-population ratio is further evidence that the labor market does not yet pose an imminent threat to the health of the economy.

Stocks had another positive week, with the S&P 500 near all-time highs by Friday’s market close. The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA
SPDR Dow Jones Industrial Average ETF Trust
(NVDA), Alphabet (GOOGL), and Tesla (TSLA), moved higher as well.

Looking below the surface, the more economically sensitive cyclical stocks outperformed defensive stocks, which are less impacted by the economy. The lower probability of recession after the healthy jobs report is reflected in the better performance of economically sensitive companies.

The crucial economic reports before the next Federal Reserve meeting on November 7 include Thursday’s consumer inflation (CPI) and another monthly jobs report. Consensus estimates expect September CPI to slow to 2.3% year-over-year from 2.5%. The Cleveland Fed’s CPI supports this view and should leave the door open to a 25 basis point cut at the November meeting.

Futures pricing reacted to the strong jobs report by slashing the expected pace of 2024 rate cuts. A short-term interest rate cut of 25 (0.25%) basis points at the November and December Fed meetings is implied. In response to the slower expected pace of rate cuts, the 2-year and 10-year Treasury yields rose to 3.92% and 3.97%, respectively.

Friday’s job report increases the probability that the Federal Reserve can engineer a soft landing with the U.S. economy remaining remarkably resilient. The Atlanta Fed’s estimate of third-quarter GDP is at 2.5%, according to their last update on October 1. As the fears of recession recede and have been reflected in all-time high stock prices, earnings will likely need to be the next catalyst for higher prices. Third-quarter earnings season kicks off at the end of the week as if on cue.