The data were much stronger than expected. In fact, the total level of payrolls for October cited in the report (which includes the upward revisions from prior months) was greater by exactly 200,000 than our already above-market forecast at MMS International. This is a more telling indicator of the degree to which market forecasts really missed the mark, given that the base-case assumption on the Street was for no revisions.
Moreover, we note that the household survey employment figure, a measure separate from the "establishment survey" of businesses and institutions used to determine the report's headline figures, jumped by 441,000 in October. And given the sharp drop in initial weekly jobless claims on Nov. 6, it wouldn't be a surprise to see even stronger hiring into yearend.
ADJUSTING EXPECTATIONS. The growth in payrolls came solely from the service sector, which added a sizable 143,000 jobs in October. Strength was widespread across the service industries. It's also worth noting that the California grocery-story strikes had little net effect, as the report indicated an actual 13,000 boost related to temporary workers being hired, while the impact of the 70,000 workers on strike or locked-out wasn't captured. Manufacturing jobs declined 17,000, a much smaller figure than in previous months.
Rounding out the report was a rise in the average workweek to 33.8 hours from 33.7 hours, while hourly earnings remained surprisingly subdued -- rising just 0.1%. This leaves earnings rising at only a 2.2% year-over-year rate.
The big payroll surprises for the three months ending in October have boosted prospects for job creation in upcoming reports, and we expect the markets to adjust their expectations accordingly. We now forecast monthly payroll gains of roughly 150,000 through the first quarter of 2004, and most market forecasts for November will likely rise above the 125,000 to 126,000 gains of the last two months as a hedge against further upside surprises. Note that November is historically a volatile payroll month because of the strong seasonal hiring pattern, and the claims data imply a continued acceleration in labor-market tightening.
TOO STRONG? How did Wall Street react to the robust payrolls data? The stock market was surprisingly muted. U.S. stocks climbed modestly, though by noon all the major indexes were off their best "spike" levels when the news was initially released. Traders appeared to be tempering their early enthusiasm over concerns that the figures could be too strong, causing the Federal Reserve to begin raising rates sooner rather than later. Those worries helped push prices of U.S. Treasury issues lower, while the dollar was little changed vs. other major currencies.
Another indication that the market is reassessing when the Fed will start tightening -- even as Alan Greenspan & Co. sticks to its guns on low inflation -- can be seen in prices of Fed funds futures, a trading vehicle for market pros to bet on future interest rate moves. After the Nov. 7 release, these pros continue to nudge forward their expectations of Fed tightening, anticipating with a 56% probability that the central bank will have hiked rates a quarter-point by March, compared to about a 40% probability a few days earlier.
By April, Fed funds futures assign odds of 90% that Greenspan will pull the trigger on a rate hike, with an implied Fed funds rate of 1.22%. Further out, the market is looking for a couple of quarter-point hikes by July, with an implied rate of 1.50%. This suggests at a minimum that the Fed will taking a harder look at its policy bias over the turn of the year -- and perhaps as early as its Dec. 9 rate-setting meeting. From MMS International staff economists