Strong Labor Reading Improves the Probability of a Soft Landing

September’s non-farm payrolls blew expectations out of the water, coming in at 254k jobs added, well above expectations of 140k. This is the strongest reading since March. After a summer of weak labor data readings, this is a reassuring reading that the U.S. economy remains resilient, supported by a healthy labor market. We remain in an environment where good economic news is good news for the equity market as it increases the potential for a soft landing. 10-year Treasury yields rose during the week as the JOLTS and ADP job reports came in stronger than expected. But the strength of this reading has pushed 10-year Treasury yields significantly higher.

The unemployment rate has been described as the single most important datapoint for the Federal Reserve’s likely trajectory. Coming in slightly better than expected, the unemployment rate decreased from 4.2% to 4.1%. The underlying resilience of today’s reading increases the probability of only a 25-bps cut at the November FOMC meeting. However, this may shift based on the October data.

Markets reacted favorably as this reinforces the narrative that U.S. economic growth remains solid. From a portfolio positioning standpoint, we believe this is the time to start redeploying cash and that equities are better positioned than fixed income. We are not currently expecting a meaningful reduction in the long end of the curve, potentially constraining fixed income’s gains. Conversely, equities stand to benefit from moderating policy interest rates while economic growth remains intact. We expect improved market breadth through the rest of the year as this economic climate is typically good for small-cap and cyclical stocks.