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 3rd. 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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