Financial News for October 4 | US Employment Statistics Worsen, Yet Long-Term Interest Rates Remain High
October 4 is a Sunday, and the stock market is closed.
To consider the market at the start of the week, it is useful to organize what happened in the US market on Friday (October 2), including the details of the figures. In this article, I will summarize the focus events for this week, centering on four points: US employment statistics, long-term interest rates, crude oil, and Japanese inflation.
First, the conclusion. I believe the biggest point this time is the following:
“US employment was weaker than expected. Even so, long-term interest rates remain high.”
Friday Market Summary
On October 2, US stocks saw all three major indices rise.
・NY Dow: $51,176.96 (+0.49%)
・S&P 500: 7,722.72 (+0.73%)
・NASDAQ: 27,190.86 (+1.19%)
NVIDIA was up 1.3%, and Tesla was up 4.7%.
The Nikkei Stock Average fell back to 68,309.46 yen (-0.94%). (Nikkei Index) Since the employment statistics had not yet been released during Japanese trading hours, the US reaction will be factored in at the start of the week. The fact that Japan and the US moved in opposite directions on Friday is partly due to this time difference. Incidentally, the Nikkei average’s year-to-date high was 72,831.73 yen on June 22, which is about 6.6% away from Friday’s closing price. Friday’s low was 68,132.16 yen.
The exchange rate is in the high 157 yen range per dollar.
① US Employment Statistics
Non-farm payrolls in September increased by 29,000 from the previous month, significantly below the market expectation of 84,000. There is a difference in estimates depending on the research institution, with some tallies putting it at 90,000. Moreover, it was below the 12-month monthly average of 45,000.
Furthermore, downward revisions for past months have compounded the situation. August was revised from +162,000 to +133,000, and July was revised from +21,000 to a decrease of 10,000, with a total of 60,000 jobs disappearing. It is content that confirms not just the single-month figure, but that “momentum is slowing.”
The unemployment rate rose from 4.1% to 4.2%. Wages remained at +0.1% month-on-month (forecast was +0.3%) and +3.0% year-on-year, marking the sixth consecutive month that they have failed to keep up with price increases.
However, there are points that should not be overlooked. In the household survey, the number of employed people increased by 406,000 and the labor force population increased by 485,000, suggesting that the rise in the unemployment rate was also influenced by an increase in people who started looking for work. It seems better to look at the weakness of the headline figure and the content of the unemployment rate deterioration separately. The fact that the Fed places more importance on the unemployment rate than the number of employed people has also been repeatedly pointed out in reports.
Even so, stocks rose because expectations for interest rate hikes receded. In the CME FedWatch, the probability of an interest rate hike in October fell from about 70% at the beginning of the week to 14%. The probability of a hold is reported to be 84%.
However, the debate over interest rate hikes is not over. A representative from Goldman Sachs Asset Management stated that the possibility of an interest rate hike in October has almost disappeared, while maintaining a scenario of one more hike in December as the baseline. Note that in the US, the Fed implemented a 0.25% interest rate hike in September. I believe the structure where “weak indicators lead to higher stock prices” is only true while expectations for interest rate hikes are receding.
② Long-term Interest Rates
On the previous day, Thursday, the 10-year bond yield rose to 5.342% and the 30-year bond to 5.683%, marking the highest level since 2002.
On Friday, immediately after the release of the employment statistics, the 10-year bond fell to 5.18%, the 30-year to 5.57%, and the 2-year to 4.73%. However, as trading progressed, they were bought back, and by the end of the session, the 10-year bond returned to positive territory at 5.281%, the 30-year at 5.629%, and the 2-year at 4.839%. The 10-year bond recovered about 10bp from its post-announcement low, and the 2-year bond recovered about 11bp. The yield spread between the 10-year and 2-year bonds was about 44bp.
It is impossible to attribute the reason why long-term interest rates did not fall even after weak employment statistics were released to a single factor. Long-term interest rates consist of the expected average of future short-term interest rates and an add-on for the risk of holding long-term bonds (term premium). According to the NY Fed’s ACM model, the term premium for the 10-year bond was 0.76% in August and 0.84% in July. Since the September figure has not yet been published, it cannot be confirmed at this time whether this rise in interest rates is due to an expansion of the term premium. I would like to wait for future updates to make a judgment.
The impact on stocks can be considered through two channels: an increase in the discount rate and a decline in the relative attractiveness of stocks. In an environment where a yield in the 5% range can be obtained from government bonds, the reason to take risks and hold stocks becomes weaker. It is likely to be a headwind, especially for growth stocks with high P/E ratios. There is also an impact on daily life, with reports that the US 30-year fixed mortgage rate has risen to as high as 7.6%.
③ Crude Oil: Brent at $102 level, WTI at $91 level
On Friday, crude oil ended trading with WTI at $91.11 per barrel (-$1.76, -1.90%) and Brent at $102.25 (-$0.06). The difference between the two has widened to about $11.
In the background, there were reports that the G7 is considering an emergency reserve release of up to 100 million barrels, which weighed on WTI. On the other hand, Dated Brent, an indicator for the physical market, has exceeded $120, leading to views that physical supply and demand are tighter than futures.
The level itself is also high, with Brent up about 59% from a year ago. High crude oil prices ripple into prices with a time lag through increases in transportation and energy costs. It is a troublesome structure for monetary policy where inflation does not subside even though the economy is slowing down.
Japan: Tokyo Core CPI Accelerates at Once
The September core CPI for the Tokyo metropolitan area was +2.7% year-on-year, exceeding the market expectation of +2.4% and surpassing the Bank of Japan’s 2% price target for the first time since January. The focus is on the content; the index excluding fresh food and energy accelerated to +3.0% (August was +2.0%), and service prices accelerated to +2.3% (up from 1.4%). The growth in service prices suggests the possibility that the rise in labor costs is beginning to be passed on to prices.
Some of this includes temporary factors. The reduction of subsidies for water charges is considered one of the factors pushing it up, and there is also the aspect that fuel subsidies have been suppressing prices until now. Therefore, it is necessary to confirm how strong the trend is with future data.
The Bank of Japan just raised its policy interest rate to 1.25% in September, the highest level in 31 years. The next meeting is on October 29-30, where new price forecasts will be released. Some private economists expect an additional interest rate hike in December.
In terms of interest rates, the new 10-year government bond yield on October 2 was 3.090%, and the 20-year bond was 3.941%. The flow where a weak yen pushes up import prices and price increases lead to expectations of interest rate hikes by the Bank of Japan is complicated for Japanese stocks. A weak yen is a tailwind for export companies, but interest rate hikes push up the discount rate for stocks. I think it is a phase where one cannot simply say “weak yen means higher stock prices.”
Focus Events This Week
October 5 (Mon): Extraordinary Diet session convened, Prime Minister Takaichi’s policy speech
The extraordinary Diet session will last for 69 days until December 12, with bills related to consumption tax cuts on food products being the focus. It is reported that the draft of the speech is expected to include a policy of responding flexibly if the market moves differently than expected regarding “responsible proactive fiscal policy,” and a policy of deciding the annual amount of government bond issuance while watching interest rate trends. How the funding source is mentioned may influence long-term interest rates. Government bond auctions are also scheduled for the 6th and 8th, which will also serve as a confirmation of the supply and demand side.
October 7 (Wed): FOMC Minutes
The minutes of the September 15-16 meeting will be released at 2:00 PM US Eastern Time (3:00 AM on the 8th, Japan time). The focus is on how widespread the committee members’ support for the interest rate hike decision was and the extent of the division of opinion regarding additional interest rate hikes. However, the employment statistics from October 2 are not reflected in the minutes. It is merely material to understand the Fed’s thinking as of September.
October 8 (Thu): Fast Retailing Earnings (Fiscal Year ending August 2026)
The earnings announcement is scheduled for October 8. The company’s full-year forecast (upwardly revised in July) is revenue of 3.97 trillion yen (+17% year-on-year), operating profit of 730 billion yen (+29%), and net profit of 500 billion yen (+15%). For the 9-month cumulative period up to the third quarter, revenue was 3.0651 trillion yen (+17.1%) and operating profit was 614.3 billion yen (+36.2%), which was strong. Since the Nikkei average is easily affected by high-priced stocks, whether it exceeds or falls short of expectations could affect the index.
To those investing via NISA accumulation
If it is long-term accumulation investment, I believe there is no need to buy or sell in accordance with such short-term news. Accumulation is a mechanism that buys less when prices are high and more when prices are low, so the effect of smoothing the average acquisition cost works more in phases with large price movements.
However, in an environment where the 10-year bond exceeds 5%, the expected return on bonds is also rising. I recommend checking while the market is calm whether the ratio of stocks is too high for your own risk tolerance and whether you have secured funds for life defense.
Summary
① September US employment was +29,000 (forecast +84,000-90,000), and the past two months were also revised downward by 60,000. The probability of an interest rate hike in October fell from about 70% at the beginning of the week to 14%
② The 10-year bond fell to 5.18% immediately after the announcement, but returned to 5.281% by the end of the session. On Thursday, it hit 5.342%, a level not seen since 2002
③ Brent is $102.25, WTI is $91.11. Tokyo core CPI is +2.7%, trend indicators accelerated to +3.0%, and the Bank of Japan will update its outlook at the meeting on October 29-30
The rise in US stocks on Friday is a movement that welcomed the retreat of interest rate hike expectations. When looking at interest rates, crude oil, and even Japanese inflation, it does not mean that the risk has disappeared. This week, if you watch whether the 10-year bond yield tests the 5.3% range again, and how interest rates move with the minutes and the policy speech, I think it will be easier to grasp the flow.
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