October 7th, 2022
Investors kicked Q4 off on a higher note with the Dow 30 rallying 765 points on Monday. That was followed with another 865-point rally on Tuesday. This was the market’s strongest two-day performance since March 2020. Investors were ready to put Q3 behind them as bond markets steadied following the UK’s announcement that it would abandon an across-the-board tax cut, and as data showed companies posted fewer job openings. Unfortunately, the rally ran out of steam towards week’s end. Another strong payroll report and services figures offset weakness in manufacturing. The data, and comments from Fed members, threw more cold water on the likelihood the Federal Reserve would soon pivot to a more accommodative monetary stance. Still, the early gains helped keep markets in the green with the Dow 30 rising 2.00% on the week.
Labor Market Resistant to Fed’s Hikes
Equity markets have not been successful in fighting the Fed, but the labor market continued to hold strong amid the fastest pace of Fed rate hikes in 40-years. The September jobs report showed firms added 263K to the payrolls. Gains were broad-based with leisure and hospitality, healthcare, professional and business services leading the way. The payroll gains were particularly notable as they came despite a 25K decline in government jobs. Hiring at the state and local level is highly seasonal, so the decline in this sector points to a particularly strong and resilient private jobs market. In a further nod to the strength of the labor market, the unemployment rate fell to 3.50% from the prior month’s 3.70%. The drop in unemployment came as the labor force participation rate held steady at 62.3%. The labor force participation rate now stands just 1.10% below pre-pandemic levels, suggesting there is zero slack in the labor market. On the earnings front, average hourly earnings rose 5% annualized. That remains below the 8.30% annualized rate of inflation, which means that despite gains, workers are paying more than they are getting. Earlier in the week, investors were hopeful that weaker jobs opening data would foretell a weaker hiring report, but that was not to be. The August Job Openings and Labor Turnover Survey (JOLTs) showed job openings fell to 10.1 million, down from the prior month’s 11.2 million as companies began to take a closer look at their hiring needs amid a slowing economic outlook. Workers, however, still felt empowered during the month to seek out new opportunities with “quits” rising 100K to 4.16 million in August. Jobless claims for the latest week, which is the most current view of the labor market, confirmed still tight labor conditions with claims totaling 219K. While the JOLTs report may have provided some initial optimism, the propensity of other readings leave little question that the Fed is going to strike again.
Services Resilient as Manufacturing Eases to a Crawl
With inflation running at 40-year highs and paychecks failing to keep up with rising prices, consumers were forced to make trade-offs between spending on services or goods. Services won out, driven by post-pandemic demand for “experiences”. The September ISM Services Index hit 56.7, beating estimates of 56.0. Numbers above 50 indicate expansion while numbers below indicate contraction. The gauge for employment rose 2.8 points to 53, which was another blow to anyone hoping a Fed pivot is on the horizon. ISM survey respondents indicated hiring would have been higher if it were not for inflationary concerns leading them to utilize contingent labor. Unfortunately, those firms are struggling to fill those particular types of positions because candidates are unwilling to accept temporary roles when the labor market is offering them permanent positions elsewhere. Aside from just employment, new export orders also proved exceptionally strong, up 3.2 points to 65.1, which is surprising given the dollar’s current strength. While services continued to expand in September, it was a different story altogether for the manufacturing sector. The ISM Manufacturing index slowed to 50.9 in September, its lowest level since May 2020. A drop in new orders and employment were a drag on the index during the month. To the degree that inflation has been a problem, there was some good news here with the pricing indicator easing by 0.8 points to 51.7. This is the index’s lowest reading since June 2020 (51.3). ISM manufacturing survey respondents reported that after four straight months of softening new order rates, they are beginning to adjust to potentially lower future demand by implementing hiring freezes and allowing attrition to reduce employment levels. With respect specifically to manufactured goods, inflation and higher interest rates are dampening customer spending and consumption of these items is beginning to normalize to pre-pandemic levels.
Markets are in overreaction mode. This was true last week, when equity markets sold off on quarter-end window dressing, and debt markets orchestrated their own minor illiquidity crunch stemming from the UK’s fumbled tax policy announcement. It was true again this week, when the JOLTs report – which is typically considered a minor, secondary report – managed to spark the biggest, two-day rally in 2 ½ years as investors clung to a tiny morsel indicating the jobs market is cooling (and its implications for a Fed pivot). Friday’s job report showed that while the job market may be cooling somewhat, it is nowhere near cool, and the Fed is going to follow through with hikes likely into 2023. Still, traders can’t seem to help wanting to bet against them. With the Fed not meeting again until November, this leaves traders with lots of time on their hands trying to make patterns out of single data points. This week it was jobs, but next week inflation will come directly back into focus with the release of PPI and CPI reports.
The Week Ahead
The market’s weekly rebound is put to the test as September inflation and retail sales reports are released.
Just in time for Halloween season, scientists have discovered three new species of slithering snakes in a graveyard and near an old church. The newly found serpents are described as cryptozoic, meaning they burrow and live underground, and in this case, literally among the dead.
The discovery was made somewhat fortuitously. A group of research biologists was returning from an expedition where they were studying frogs when they stopped in a remote cloud forest town in Ecuador in the Andes mountains. A conversation with a local villager about amphibians and snakes led them to the cemetery where the resident noted she had seen snakes while visiting the graves of her relatives. Based on her description, the researchers hypothesized that the snakes she saw were from a genus of serpents that had not been recorded in that part of the world and that had not been seen by many humans because the serpents are generally rare and remain hidden for most of their lives. The team began searching for the scaly, beady-eyed creatures, being careful not to disturb the dead. Their detour led to the discovery of three species of ground snakes new to science that were buried in the soft soil next to the graves and elsewhere in the village. The serpents were described as small, cylindrical, and archaic looking.
A local schoolteacher named Diego Piñán shared that he had been teaching about the importance of snakes since he arrived in the town in 2013 and encouraging the locals not to kill them. Ground snakes are not venomous and are thought to be harmless to humans, except to anyone with ophidiophobia, or fear of snakes. The snakes had been generally feared by locals and many had been killed, but the town’s attitudes towards snakes were changing. Piñán collected the dead snakes he found and preserved them in jars of alcohol that he provided to the biologists to assist with their research. This enabled the scientists to extract DNA from the snakes’ bodies and to use the specimens to count scales and measure body proportions which are essential steps to identifying new species.
The scientists proposed naming the three new species in honor of institutions or people supporting the exploration and conservation of remote cloud forests. Atractus discovery or A. discovery which has especially small eyes and a yellow belly with a black line was named to honor The Explorers Club Discovery Expedition initiative, an organization dating back to 1904 that provides funding for scientific expeditions and that had provided funding to their expedition. Atractus zgap or A. zgap which has a yellow belly with no line was named in honor of the Zoological Society for the Conservation of Species and Populations (its acronym in German is ZGAP), a program based in Germany that supports conservation efforts of endangered species and their habitats. Atractus michaelsabini or A. michaelsabini was the largest of the three small snakes and named in honor of a conservationist whose family has supported habitat protection and field research of threatened reptiles for several decades.
We hope snakes and graveyards put you in the Halloween spirit. Happy early Halloween from all of us at Probity Advisors, Inc.