Highlights for this week include:

October’s labor market report and business surveys suggest slower growth to start the fourth quarter after the third quarter’s exceptional 4.9% growth rate. However, both the labor report and business surveys are signaling lower inflation pressures and provide justification for the Federal Reserve (Fed) to keep interest rates steady.

Stocks have impressively broken out of their three-month downtrend, which increases the odds of a further year-end rally. Stocks are being supported by third-quarter profits that continue to come in better-than-expected. Rising interest rates have been a major headwind for stocks, and lower inflation that is enabling the Fed to hold interest rates steady is also supporting stocks.

Signs of Slowing in the Economy

Last Friday’s October labor market report showed clear signs of slowing in the labor market. Nonfarm payrolls increased by 150,000, with the prior two months revised down by a total of 101,000. From the initial release to the final revision, payrolls have been revised lower in 7 of the past 8 months.

Nearly all the jobs came from the non-cyclical private education and health services and government sectors. The unemployment rate ticked up to 3.9% from 3.8%. Importantly, average hourly earnings slowed to 4.1% from an upwardly revised 4.3%.

The loss of momentum in the labor market suggests the cumulative impact of prior rate hikes are finally starting to show up in the data. The cooling in the labor markets justifies the Fed remaining on hold and implies a low probability of further interest rate hikes, with interest rate markets assigning a 90% chance that the Fed will keep rates steady at the December 13th Fed meeting.

The service sector business surveys are also consistent with slower economic growth. The ISM Services PMI (a timely business survey) fell to a five-month low in October to 51.8 (readings above 50 suggest an expanding service sector). It suggests continued but slower growth in services activity. Per the ISM, the Services PMI corresponds to a 0.7% economic growth rate on an annualized basis, which would imply a significant slowdown from the 4.9% third-quarter growth rate.

The manufacturing business surveys remain consistent with weaker activity. The ISM Manufacturing PMI dropped 2.3 points in October to 46.7, a three-month low. It has been below the 50 boom/bust mark for the past year, indicating continued contraction of factory activity. The latest decline was the first in four months and the most since June 2022, reversing the budding signs of stabilization in the sector.

Importantly, the Prices Indexes for both manufacturing and services are consistent with lower consumer and producer price pressures and provide further justification for the Fed to keep rates steady.

Global Backdrop Is Also Consistent with Slower Economic Growth

The J.P. Morgan Global Composite PMI (combined manufacturing and service sector business survey) continued the downward trend seen over recent months. The October drop marked the fifth consecutive monthly decline. Expansion is being led by India, Japan, and Brazil, while weakness is centered in Europe, although there are signs of a downshift in China and other parts of Asia.

However, this survey is also consistent with slower inflation, with rates of increase in both input costs (three-month low) and output charges (weakest since December 2020) slowing.