It was another week of market volatility as participants continue to balance the prospects of a looming recession and the Fed’s fastest series of rate increases in 40 years. This morning, both domestic stocks and bonds are down. US equities are set to finish the week higher after giving up some gains that occurred earlier this week. The S&P 500 is up approximately 3% for the week while the NASDAQ and Dow Jones are up 2% and 2.7% respectively. Looking at bonds, yields drifted higher across the curve, reversing the moves from last week and earlier this week. The US dollar was flat last week coming down slightly from a 20-year higher the week prior. The 10YR US Treasury yield is currently hovering around 3.9% after lowering to 3.6% at beginning of the week. The 2YR UST Yield also increased and currently trading at 4.3% after a drop to 4.1% on Monday. The Treasury yield curve remains inverted as the most commonly quoted 10s vs 2 spread is negative 42 basis points. The bond market will continue to see volatility as the FOMC meets two more times this year in early November and mid-December. Expectations are for further increases in the Federal Funds rate taking short term rates towards 4% or higher by year-end.
Turning to economic data, there was plenty to talk about. The Institute of Supply Management (ISM) released their monthly Purchase Manager Index (PMI) for both manufacturing and services. Both of these surveys are considered leading indicators and have seen declines. On Monday the manufacturing index showed a drop to 50.9 which was a disappointment given economist forecast of 52. Within the manufacturing survey, the employment component dropped to 48.7 (less than 50 indicates contractionary levels). On the other hand, ISM Services PMI came out on Wednesday and surprised to the upside with a reading of 56.7 (survey was 56). On Tuesday, the Bureau of Labor Statistics (BLS) released the heavily watched JOLTS report (Job Opening and Labor Turnover Survey) for August. Within the JOLTS, there was an eye-popping drop over of 1 million job openings from the readings. This brings the total number of openings to around 10mm (from 11.1mm last month) and was the largest drop since April 2020 during the early days of the pandemic. One primary data point from the JOLTS is the number of job openings vs unemployed, this ratio dropped to 1.7 from a recent of high of 2 which illustrates that the tightness in the labor market could be loosening and have peaked. Also in the housing market, mortgage activity dropped to 25-year low as the 30Yr rate is around 6.75%.
Last and certainly not least is the Friday monthly Jobs report. The US economy added 263,000 jobs in September which was slightly above the consensus estimate of 255,000. This was a drop from 315,000 in August and 537,000 in July. The Unemployment rate dropped unexpectedly to 3.5% from 3.7% last month. Labor force participation declined slightly from 62.3% from 62.4% which would lend to the lower unemployment rate reading. Average hourly earnings increased 0.3% which brings the reading to 5.0% YoY which is not enough to keep from real wages from declining further potentially slowing future consumption growth.
Next week yields another slate of economic data and all eyes will be focused on the monthly CPI/inflation report for August which will be released Thursday. The current projections are for modest monthly increases in both headline and core inflation. Headline CPI (which includes food and energy) is projected to be 0.2% MoM (from 0.1% last month) and core CPI is expected to increase 0.4% MoM. If these expectations are realized this would bring YoY inflation down to 8.1% headline (from 8.3%) but core would be up to 6.5% YoY (from 6.3%).
Happy Columbus/Indigenous People Day!
The number of job openings declined by 1.1 million August and now brings the ratio of job vacancies to unemployed persons down to 1.67 (from a high of 2 in July). Still higher than 1.15 ratio at the end of 2019, pre-pandemic but a welcome sign that the tightness in the labor markets could be abating.
US Job Openings to Unemployed – August = 1.67
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Matt Harris, CFA
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The Baker Group LP
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