September Jobs ReportU.S. Job Growth Remains Strong

The reaction on Wall Street was most evident in the $25 trillion market for U.S. Treasuries, where yields on government bonds had already been climbing sharply over the past couple of months. Persistently strong economic data has cemented an expectation that the Fed will need to keep interest rates elevated for longer than previously thought to complete its aim of slowing inflation.

On Friday, the yield on the 10-year Treasury bond, a benchmark interest rate that underpins borrowing around the world, briefly shot up to 4.88 percent, its highest level since 2007, before easing back to 4.80 percent. In late July, that yield, indicative of the cost of borrowing for the U.S. government, stood at 3.75 percent.

The yield on the 10-year Treasury bond is a crucial input to virtually every other long-term interest rate in the world. Higher treasury yields indicate higher costs ahead for consumers and businesses, in turn weighing on company valuations in the stock market.

“If yields keep moving higher, they’re going to create more restraint on the economy,” said Drew Matus, the chief market strategist at MetLife Investment Management.

The dollar initially rose alongside higher rates, but ended the day 0.2 percent lower after the turn in the market.

The reaction in the stock market was also significant, traders said, exemplifying investors’ sensitivity to interest rates, and also the hope that corporate America’s resilience could continue even if policymakers are prompted to further restrict the economy.

The S&P 500 recovered from early losses to rally 1.2 percent for the day, rising as the yields on Treasuries eased. The rebound was enough to end a streak of weekly declines since the start of September.

Companies more dependent on the outlook for the American economy initially suffered a more severe reaction among investors, but even there, trading reflected the recovery in the Treasury market as the day went on. The Russell 2000 Index of smaller companies rose on Friday but was lower for the week after turning negative for the year on Monday. The S&P 500 is still roughly 12 percent higher than it was at the start of 2023.

Investors and analysts noted that the immediate market reaction would take time to settle, as rapid, automated trading, programmed to react to specific levels from data such as the jobs report, gave way to a broader group of investors entering the market.

Given the data also extended a broader sell-off, investors had already dialed back their bullishness, analysts said, making for a softer change in sentiment reflected in the immediate price moves.

Investors are also trying to make sense of conflicting signals for the long-term outlook of the economy.

On the one hand, the fresh jobs data points to a resilient economy, tempering immediate concerns about an economic downturn. However, a stronger-than-expected economy also suggests the Fed will need to do more to slow it down and get inflation under control. That could mean further headwinds for companies and consumers ahead, fanning fears that the Fed could go too far, tipping the economy into recession.

Although the number of jobs added to the economy rose substantially, wage growth came in below economists’ estimates. That adds to a narrative of a tougher time ahead for consumers, just as some consumer-facing companies gear up for the holiday sales season.

“The economic narrative is one that is difficult for consumer incomes and corporate profits ahead,” Ms. Goodwin said.

The speed of the sell-off in the Treasury market is also “worrying,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, raising concerns about the potential for the plumbing of financial markets to come under strain as swaths of investors try to reorient themselves after each additional piece of economic information. That fear has become especially acute after previous ructions in the Treasury market and in other government bond markets around the world.

And there could still be further to go. Even before the fresh jobs data on Friday, some Fed policymakers had maintained a preference for further interest rate increases. Investors, however, are not so sure, maintaining only a low chance that the Fed raises rates again when it meets next month.

“I think the market may still be underpricing the risk the Fed hikes in November,” Ms. Goodwin said. “It’s that move that concerns me.”

That pace of hiring suggested that the labor market continues to chug along even in the face of the Fed’s 19-month campaign to cool the economy by raising borrowing costs. Central bankers have lifted rates to a range of 5.25 to 5.5 percent, and suggested at their September meeting that they could make one more rate move in 2023 before holding borrowing costs at a high level throughout 2024.

The question now is whether policymakers will see the job market resilience as a welcome development — or a concerning one. The Fed’s next meeting is Oct. 31 to Nov. 1, so policymakers will not receive another employment report before they need to make their next rate decision.

Fed officials had embraced a recent slowdown in hiring — and that trend now seems far less certain. But the September jobs report did contain some evidence that the economy is simmering down. The data showed that pay grew at only a modest pace in September, for instance.

Given that, the strong job gains alone might not be enough to force the Fed to make another rate increase this year. Officials are likely to continue to watch other incoming data — including an inflation report set for release on Oct. 12 — as they contemplate whether borrowing costs need to rise further.

Employment data “continues to say it’s a strong labor market, but it is getting a little bit less tight than we saw before,” Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said during a CNN International interview on Friday afternoon. Given that wage growth continued to cool, she said the fresh report “doesn’t really change my view that we have a strong labor market and yet — and good — we also see inflation progress.”

Economists noted that a few key developments could slow growth this autumn, which could also keep the Fed from reacting too sharply to the fresh hiring figures. Longer term interest rates in financial markets have climbed sharply in recent weeks, for example, and that will make it more expensive for consumers to finance a car or house purchase and for businesses to expand.

“In isolation, economic data would probably justify the Fed hiking at the November meeting — what gives me pause for thought is the fact that long-term yields have increased significantly,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “They will have to weigh how much the recent rise in yields and tightening in financial conditions has done the job for them.”

Ms. Mester had previously said that she was in favor of a rate move at the Fed’s upcoming meeting if economic data held up, but added a caveat to that expectation on Friday, in light of the market moves.

She said she would make the rate decision “once I get in the room in November — at our next meeting — about whether that’s still true, because there’s other things happening in financial markets.”

The jobs report initially made Wall Street wary that the Fed might raise interest rates further, something that would weigh on corporate profits and stock valuations. The S&P 500 slipped just after the report. But stocks rebounded throughout the day — suggesting that investors became less worried as they digested the data, and determined that it suggested economic resilience but not necessarily overheating.

Some of that comfort could have come from the news on wages. Average hourly earnings were up 4.2 percent from a year earlier, the mildest increase since June 2021.

Unemployment was also in line with what the Fed has been expecting. Officials have continued to predict that unemployment would probably rise slightly as the economy slowed, to about 4.1 percent, which would still be low by historical standards. The rate stood at 3.8 percent as of September, up slightly from 3.4 percent earlier this year.

And although September hiring was strong, speed bumps lay ahead for the economy. The recent increase in mortgage rates and other borrowing costs is likely to squeeze growth just as the economy faces other challenges — including the resumption of student loan payments, strikes at car manufacturers and in other industries and dwindling consumer savings piles.

“The auto union workers strike will weigh on job growth in October while easing consumer spending and more cautious business activity will lead to slower labor demand,” Gregory Daco, the chief economist at EY-Parthenon, wrote in a note following the report.

If officials decide to leave interest rates unchanged at the upcoming meeting, they will have one final opportunity to adjust them this year when they meet on Dec. 12-13.

Joe Rennison contributed reporting.