Jobs growth slowed to 261,000 in October, but only from an upwardly revised 315,000 in September, which was 263,000 previously. (ddp)

Jobs growth slowed to 261,000 in October, but only from an upwardly revised 315,000 in September, which was 263,000 previously. The unemployment rate rose to 3.7%, a modest rise from 3.5% in the prior month, which had matched a 50-year low.

The underlying picture painted by the data was one of continued labor market strength. Although the average hourly earnings figure fell slightly on a year-on-year basis, falling from 5% to 4.7%, it accelerated on a month-on-month basis, from 0.3% in September to 0.4% in October.

Labor market participation edged lower by 0.1 percentage points to 62.2%, an indication that the pool of untapped workers ready to enter the workforce is declining. Ideally, the Fed would like to see the figure rising, with a stream of new workers helping to reduce upward pressure on wages.

The data follows hawkish rhetoric last week from the Federal Reserve. Chair Jerome Powell indicated that it was “very premature” to think about pausing rate hikes. His comments came after the Fed raised benchmark rates by 75 basis points for the fourth consecutive meeting, setting the federal funds target range between 3.75% and 4%. Powell warned that the Fed still had “some ways to go” in its efforts to tame inflation, adding that data since the last policy meeting in September “suggests that the ultimate level of interest rates will be higher than expected.” At that last meeting, the median expectation of Fed policymakers was for a peak in rates of 4.6%. Markets are now priced for rates to peak around June next year, at over 5%.

The Fed hinted it could slow the pace of rate rises at the December meeting. In our view, there is nothing in the latest jobs data to tilt the balance either way. The labor market remains tight. While the job creation rate is trending lower, any figure above 100,000—the demographic rate of labor force growth—is unsustainably strong, in our view.

The focus will now turn to the release of the Consumer Price Index this week. Investors will be hoping for a slowdown, though we note that the Cleveland Fed’s nowcast has October CPI inflation running at 0.8% over the month. We think the Fed will need to see core PCE inflation at 0.2%month-over-month, or lower for three months, before it would start to consider pausing rate hikes.

We have urged investors to be cautious regarding the recent rally, which took the S&P 500 up 9% from its low point in mid-October. But given the potential for periodic bounces, we favor strategies that add downside protection while retaining upside exposure.

In our view, the risk-reward for markets over the next three to six months is unfavorable. Against the current backdrop, we recommend focusing on defensive assets when adding exposure. Within equities, we like capital protected strategies, value, and quality income. We like global healthcare, consumer staples, and energy, and have a least preferred stance on growth, industrials, and technology. By region, we like the cheaper and more value-oriented UK and Australian markets relative to US equities, which have a higher technology and growth exposure and where valuations are higher.

Within fixed income, we prefer high-quality and investment grade bonds relative to US high yield. And in currencies, we prefer the safe-haven US dollar and Swiss franc relative to the British pound and euro. Click here for more. We also recommend seeking uncorrelated returns in hedge funds.

Main contributors - Mark Haefele, Vincent Heaney, Christopher Swann, Alison Parums, Jon Gordon, Daisy Tseng

Content is a product of the Chief Investment Office (CIO).

Original report - Stocks rebound despite tight labor market data, 7 November 2022.