Markets Rally on Debt Ceiling Extension

October 8th, 2021

A short-term debt ceiling extension helped turned market sentiment positive this week. The immediate financial crisis was averted by lawmakers agreeing to raise the debt ceiling limit by $480 billion. That will allow the federal government to continue to pay its bills through December 3^rd. In economic news, it was a mixed bag of data for investors. Friday’s jobs report disappointed as businesses only managed to add 194,000 works to their payrolls in September. That was significantly below estimates of 500K new hires. However, the services industry sidestepped the labor market’s problems with the Institute for Supply Management Services Index reporting another exceptional month of expansion. Optimism over the short-term debt ceiling extension trumped the jobs miss and for the week, the Dow Jones Industrial Average rose 1.22%.

Payrolls Fall Short

Economists were hopeful the labor market would rebound strongly in September, having forecasted 500K new hires. Their models, however, came up well short with businesses adding just 194K to their payrolls. That was their slowest pace of the year. The shortfall was varied but influenced in part by challenges within the local government education sector, who have struggled to hire bus drivers, food service workers, and substitute teachers. Despite the jobs miss, the unemployment rate managed to beat expectations, dropping to 4.80%, which surpassed estimates of 5.10%. The decline was driven by the continued drop in the labor force participation rate, which fell to 61.60% from 61.70% in August. That remains below the pre-pandemic labor force participation rate of 63.3%. Several issues have kept individuals from returning to the workforce including concerns over the virus, family responsibilities, skills mismatch, high savings levels and changed attitudes or priorities following the pandemic. However, those who have jobs are seeing healthy wage gains. Wages were up 0.60% in September, pushing the year-over-year rise to 4.60%. The larger paychecks should help cushion workers against the recent spike in inflation. Although the jobs report was disappointing on the topline, it did manage to show healthy gains in professional and business services, transportation and warehousing, and manufacturing which are all critical to the continued economic expansion.

Business is Brisk

Supply chain constraints, labor shortages, and high materials costs failed to dent demand in the services sector in September. The ISM Services Index rose to 61.9, up from the previous month’s 61.7. Numbers above 50 signal expansion and numbers above 60 are considered exceptional. New orders and production helped lift the index higher during the month, increasing to 63.5 and 62.3, respectively. Growth was broad-based with 17 of 18 industries reporting expansion. Demand in the services sector should remain strong in the coming months as we approach the holiday season.

Stocks rebounded this week as investors breathed a sigh of relief that lawmakers were able to agree to a short-term debt ceiling extension through December. The news turned investor sentiment positive and helped them shake off the weaker than expected jobs report and the early week jitters over rising bond yields. The 10-year treasury yield has risen to 1.61% as of Friday’s close. That’s not far from the year’s high of 1.75% which, if reached, could rattle markets. Dip buying has been the pervasive response to volatility over the past year. With increasing labor shortages, higher material costs and growing materials constraints, the perception is beginning to emerge that inflation and higher rates are increasingly supply-side related and no longer due to simply pent-up demand – the former being far more stubborn to control. Should the Fed start tightening as expected later this year, this bull market is likely to be tested, and it remains to be seen if those same dip buyers will continue to buy when faced with both rising rates and inflation.

The Week Ahead

The consumer takes center stage with the release of the September retail sales report. Investors will also pour over the latest figures on consumer and producer prices.

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The Pinch that Stole Christmas

This holiday season is already stacked up to be a challenging one for retailers and shoppers. All types of issues are wreaking havoc on getting gifts under your tree, from supply chain disruptions to parts and labor shortages, to rising prices and shipping delays. Everyone will likely feel the pinch this yuletide. Businesses say they’ve never seen anything like this. Below are some of the reasons for the bottlenecks:

Labor shortage: We previously wrote about the labor shortage here. Willing workers are still hard to find. This is not only true for retail, but also further up the supply chain with longshoremen to unload goods at ports and truckers to move the goods to warehouses and then to retailers and consumers. As retailers continue to struggle to hire regular staff in addition to seasonal workers, shoppers may find bare shelves, long check-out lines, and lack of inventory.

Factory closures: Covid and its Delta variant have kept factories from working at full capacity or have caused them to close during outbreaks.

Trucking shortages: Not only is there a shortage of around 100,000 drivers in the U.S., but there is also a delay in getting truck parts to keep trucks running. The driver shortage – which was already problematic pre-pandemic – is caused by several factors, including an aging driver workforce and early retirement, and a recruiting problem with younger workers not entering the industry compounded by COVID-canceled driving school classes.

Consumer demand: The demand for goods has skyrocketed. Take furniture as an example: sales from furniture and home furnishings stores came in at $45.1 billion during the first four months of 2021, which is a 45.3% increase over last year. Toy sales in the first half of 2021 reached $11 billion, a 19% increase over last year. The company that makes Legos reported a 36% sales spike in the first half of 2021. Manufacturers and the global supply chain are struggling to keep up.

Port delays: Ports in Southern California, which are responsible for nearly half of all U.S. imports, have hit record high numbers of container ships waiting to unload. Covid outbreaks have idled port terminals, and safety protocols and labor shortages have hampered productivity. Because ships can’t be unloaded, not enough empty containers are available at ports to move all of the stuff that consumers are buying. When goods are unloaded, there aren’t enough drivers to move them to warehouses and stores. It’s a traffic jam of epic proportions.

Price increases: Before the pandemic, a shipping container of merchandise from Asia to the U.S. would have cost around $3,000 in sea freight. Recently, that number is at least $30,000. Shortages of shipping containers and raw materials combined with supply chain disruptions have caused prices of nearly everything to skyrocket. The deals that attract bargain shoppers will likely not be seen in 2021.

The Christmas creep will be very real this year as retailers try to get ahead of the pinch at all levels of the global supply chain. Experts advise consumers to shop early and plan on getting those packages mailed in the first two weeks of December to arrive in time for Christmas. Businesses are grateful that consumers are opening up their wallets, but it will be a challenge to meet that demand. Retailers are hoping their customers will be patient and are advising shoppers that if they see something they want, buy it when they see it because they don’t know if or when they will be able to replenish inventory. Christmas is just 10 weeks away, so you can follow retailers’ advice and start shopping, plan to send gift cards, or dust off Aunt Helen’s fruitcake recipe and bake your gifts this year.

MARKET COMMENTARY