Risk Assets Rally as Friday’s Payrolls Report Seen Delaying Fed Tightening

US stocks and commodities rallied while Treasury yields and swap rates rose after Friday’s weak employment report pushed back Fed rate hike expectations.  Trading in Fed funds futures now implies the odds of a hike don’t climb above 50% until March 2016, but the Fed meets two more times this year and officials have maintained that a rate hike is still on the table.  Friday’s payrolls report was a large disappointment, but it’s worth noting that the US economy only needs to add 85,000 jobs/month to maintain the current unemployment rate given current population growth, so the one report doesn’t significantly alter the US employment outlook.  In comments made on Friday, St. Louis Fed President Bullard downplayed the report, saying the labor market has been improving for a long time, and sub-200,000 monthly payrolls numbers will become the norm “in the next couple of years”.  He argued that that FOMC already hit its objective on unemployment, and that inflation would be close to target if not for the large oil price shock.  It will be interesting to see if voters on the committee share his sentiment.

Oil prices rallied for the second straight day after reports that Russia is willing to meet other major oil producers to discuss the market.  Russia is one of the world’s top three oil producers, and Moscow has been unwilling in the past to cut output to support prices.  Despite the massive fall in global crude prices, Russian output hit a new post-Soviet monthly high of 10.74 million barrels per day in September. A weaker dollar also helped boost oil prices.  It’s unclear, however, how sustainable the recent rally is given the amount of excess supply still in the market.

US economic data and earnings are fairly light today.  Both Markit’s US Composite PMI and US Services PMI fell from August, while the ISM’s non-manufacturing composite fell to its lowest level since June.