Stocks Churn Around on Weak Jobs Report

Stocks opened mixed this morning, responding mostly to the monthly jobs report and rising interest rates. Energy and financials are catching a bid, whereas most other sectors are flat to down. WTI crude oil jumped to $79.50/barrel. Both copper and gold are up in early trading. The bond market is broadly lower as rates climb. Safe-haven Treasuries are faring the worst, whereas junk corporates are about flat. The 10-year Treasury Note yield popped up to 1.61%, the highest since June. And bankrate’s average 30-year fixed mortgage rate is up around 3.15%. Over the past couple of weeks inflation expectations edged higher. Judging from the Treasury Inflation-Protected Securities (TIPS) market, inflation over the next two years will average 2.8%. That’s not terribly high, but it is clearly a step-up from the 1.5% to 2% over the past 10 years.

The Bureau of Labor Statistics’ Employment Situation Report disappointed those looking for continued strength in the jobs market. The economy generated a net new 194,000 jobs in September vs. 500,000 expected. It is true that prior month payrolls were revised sharply higher than initially reported. But it’s hard to escape the fact that job growth has slowed recently. That said, the official unemployment rate fell to 4.8% and under-employment—including those settling for part-time work but who want a full-time position—fell to 8.5%. The primary reason for that decline is that women are dropping out of the workforce. As you might expect, wage growth is accelerating. Wages were 4.6% higher than year-ago levels, which essentially offsets the current inflation rate. Obviously, the recent Covid wave hampered economic activity, and therefore hiring activity. So we don’t need to conclude that the labor market is in a persistent slowing trend. But this report, closely watched by the Federal Reserve, will clearly complicate their decision to begin tapering monetary stimulus. My sense is that investors expect the Fed to go ahead with tapering next month.

Earnings season is nearly upon us, and we’ll be hearing from public companies regarding the health of the economic recovery. We’re sure to hear a lot about persistent global supply chain disruptions. This is probably the single biggest headwind to corporate earnings at the moment. It’s not clear why the situation isn’t getting any better. Of course, we know that Covid Delta briefly shut down some factories and ports in Asia. But that doesn’t explain why hundreds of cargo ships are waiting to be unloaded along California’s coast. It seems like we just don’t have the infrastructure to deal with a massive surge in demand. As evidence, the Port of Oakland just added four new cranes to ease its backlog. Coming out of the pandemic, consumers have money and are eager to spend. Businesses are terrified they won’t have enough product to sell (and Christmas is coming). MIT professor John Sterman says we’re not in this situation “because of the pandemic. It’s because of the way human beings reacted to the fear that the pandemic induced. That’s missing in the supply chain discussion these days.” Bloomberg News ran an article quoting the CFO of Costco (COST) thus: “We’re ordering as much as we can and getting it in earlier, and I think as evidenced by most recent sales results, we’re doing OK with this.” And Tesla’s (TSLA) Elon Musk recently said, “Fear of running out is causing every company to over-order—like the toilet paper shortage, but at epic scale.” This fear-based over-ordering likely won’t subside until the after the holiday shopping season. Bloomberg Economics actually sees this as a temporary positive. Strong consumer demand and low corporate inventories will spur economic activity that could “partly offset fading fiscal outlays as the growth driver next year.”