We’re hoping this past week was a glimpse into the remainder of October as in the end there was very little movement in the large cap S&P 500. On the equity side, of note was the spike in energy prices along with the corresponding securities associated with that sector as the tensions in the middle east smolder. Regarding fixed income, the week came down to Friday as a stronger than expected September Payroll Report (see below) pushed interest rates sharply higher as well as steepened the yield curve (the relationship between short- and long-term bonds). In fact, in response to the jobs number, the yield on the 2-year and 10-year U.S. Treasury Notes rose by 23 and 13 basis points (1/100 of a percent) to 3.93% and 3.98% from 3.60% and 3.85%, respectively. Mortgage rates also ticked higher. The U.S. dollar also strengthened on the back of the labor report.
We would expect continued volatility in the labor market as the Boeing Strike Continues, Winter is coming as is the Holiday Season, at some point the rebuild from the devastation resulting from Hurricane Helen will commence (our thoughts and prayers go out to all affected) and workers are hoping to protect themselves from the ramifications resulting from the adoption of Artificial Intelligence (AI) by companies.
- Prior to the September Payroll Report, the futures market was anticipating a total of 1.00% in rate cuts prior to the end of this calendar year. However, given the strength of the report, that was reduced to 0.50%. The Fed has said it is data dependent and as such will rely on this report along with others, namely the release of retail and inflation data later this week in the form of the Consumer and Producer Price Indexes.
- This bears watching. Over the past three months the iShares MSCI ACWI ex US ETF (ACWX, a large cap equity index that excludes the United States has risen 5.61% while the SPDR S&P 500 ETF Trust (SPY) has risen 4.22.% Analysts have been expecting international to begin playing catch-up with the U.S. We’ll see if this is the start or just another head fake.
“It’s The Economy…”
· Non-Farm Payrolls (approximately 80% of the U.S. workforce) rose by 254,000 during September, substantially above the consensus estimate of 159,000. Payroll numbers for the prior two months were revised to 159,000 and 144,000 from 142,000 and 55,000 during August and July, for a net gain of 72,000. The rolling three-month average surged to 185,666 from 116,333, somewhat far below the 203,000 y/y growth. The Unemployment Rate ticked down to 4.1% during September from 4.2% in August. The Unemployment Rate had gotten as low as 3.4% in April 2023. According to Haver Analytics, “household employment rose 430,000 after increasing 168,000 in August. The labor force increased 150,000 after a 120,000 August gain.” Average Hourly Earnings rose 0.37% or $0.13 to $35.36 during September from $35.23 one month prior and by $1.35 or 3.97% from $34.01 y/y. In fact, the y/y pace of earnings rose from 3.83% during August to 3.97% in September. Average Weekly Earnings rose 0.08% or $0.92 to $1,209.31 during September from $1,208.39 during August. Average Weekly Earnings over the past year have risen by $39.37 or 3.37% from $1,169.94 as Average Hours Worked slipped to 34.2 in September from 34.3 in August and as compared to 34.4 hours one year ago. (Source, U.S. Department of Labor)
· The Institute for Supply Management’s Composite Index of Non-Manufacturing (service) sector activity, comprising approximately 75% of U.S. economic activity, rose to 54.9% during September from 51.5% in August. This month’s reading is the highest since February 2023. Of note was Employment (48.1% v 50.2%) along with the Prices Paid Component which edged up to 59.3% during September from 57.3% during August. (Source, Institute for Supply Management)
· Initial Claims for Unemployment Benefits for the week ended September 28th remained tame, rising 6,000 to 225,000 from 219,000 the prior week, which was revised 1,000 higher. The four-week rolling average fell 750 to 224,250 from 225,000 which was revised up by 750. Continuing claims for the week ending September 21st fell 1,000 to 1,826,000 from 1,827,000 the prior week, which was revised lower by 7,000. The continuing claims four-week average fell 4,750 to 1,829,250 from 1,834,000. (Source, U.S. Department of Labor)
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “the decline in mortgage rates has stalled due to a mix of escalating geopolitical tensions and a rebound in short-term rates that indicates the market’s enthusiasm on rate cuts was premature. Zooming out to the bigger picture, mortgage rates have declined one and a half percentage points over the last 12 months, home price growth is slowing, inventory is increasing, and incomes continue to rise. As a result, the backdrop for homebuyers is improving and should continue through the rest of the year.” Our take –the better-than-expected jobs number (Non-Farm Payroll; Department of Labor; Oct 4, 2024) really put a crimp in the continuation of the decline in interest rates. Unless, some unanticipated data comes to the fore, mortgage rates should remain at or above these levels pending either a confirmation or repudiation of the unanticipated strength in the labor market, a process that will most likely take us though the balance of 2024.
Worth a Click
· Per Federal Reserve Chair Jerome Powell, speaking Monday before the National Association for Business Economics, “looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course.” Powell added that “this is not a committee that feels like it’s in a hurry to cut rates quickly. If the economy performs as expected, that would mean two more rate cuts this year, a total of 50 more.” Somewhat prescient given the jobs report on Friday, four days later. (Source, U.S. Federal Reserve)
· The longshoremen were also apparently concerned with the impact that Artificial Intelligence (AI) would have on their numbers as in addition to higher wages they were demanding “a total ban on automation of cranes, gates and container movements.” Perhaps they see this contract as the last in which they will have bargaining power. The dockworkers settled the wage and benefit component, but left AI on the table for future negotiations. (Source; Tom Krisher, Fortune Magazine)
Upcoming Economic Reports scheduled to be released this week include the following, on Monday, September Consumer Credit; Tuesday, August U.S. Trade Deficit; on Wednesday, August Wholesale Inventories; on Thursday, the Weekly Report of Initial Claims for Unemployment and the September Consumer Price Index (CPI) and, on Friday, the September Producer Price Index (PPI) along with a preliminary look at Consumer Sentiment from the University of Michigan.
The Q3 Earnings Season is about to begin. The following is a partial list of reports that may impact market sentiment. These include – PepsiCo (PEP), Helen of Troy (HELE), Progressive (PGR), Delta Air (DAL), Domino’s Pizza (DPZ), BlackRock (BLK), Wells Fargo (WFC), Bank of NY Mellon (BNY), Fastenal (FAST) and JP Morgan Chase (JPM).
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