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Weekly Update 10/07/2022: US Economy Adds 263,000 Jobs in September

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Domestic Economic News

Interestingly weak economic data early on Monday & Tuesday helped ease pressure on U.S. interest rates causing the U.S. dollar to decline on a relative basis and both equities and high quality bonds to rally. The thought process amongst traders is that weakening U.S. data applies less pressure on the fed to be super aggressive on interest rate hikes.

A gauge of US manufacturing stumbled in September to a more than two-year low, moving closer to outright stagnation as orders contracted for the third time in four months. The Institute for Supply Management’s gauge of factory activity dropped nearly 2 points to 50.9, the lowest since May 2020, according to data released Monday. A reading of 50 separates expansion and contraction, and the September result was weaker than the median projection of 52 in a Bloomberg survey of economists. The purchasing managers group’s measure of new orders declined more than 4 points to 47.1, also the lowest level since the early months of the pandemic and an indication that demand is softening. Consumer spending on merchandise is settling back and while business investment in equipment has held up, economic growth concerns are mounting as the Federal Reserve raises interest rates to combat inflation. “Following four straight months of panelists’ companies reporting softening new orders rates, the September index reading reflects companies adjusting to potential future lower demand,” Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said in a statement. Nine manufacturing industries reported growth in September, led by mineral products, machinery and plastics. Seven industries reported contraction, including furniture, textiles and wood.

Meantime, a measure of prices paid for materials used in the production process retreated for a sixth-straight month. At 51.7, the price index is the lowest since June 2020, likely reflecting pullbacks in prices for oil, metals and other commodities on global recession worries. The ISM index of export orders contracted by the most in more than two years. In addition to the falloff in orders, the ISM’s composite gauge was driven down by declines in gauges of factory employment and supplier deliveries. The weakening in employment, which showed contraction for the fourth time in five months, may be the combined result of still-tight labor markets and the moderation in demand.

Home prices in the US have taken a turn and are now posting the biggest monthly declines since 2009. Median home prices fell 0.98% in August from a month earlier, following a 1.05% drop in July, mortgage-data provider Black Knight Inc. said in a report Monday. The two periods mark the largest monthly declines since January 2009. “Together they represent two straight months of significant pullbacks after more than two years of record-breaking growth,” said Ben Graboske, Black Knight Data and Analytics president. The housing market is losing steam fast with skyrocketing mortgage rates driving affordability to the lowest level since the 1980s. The Federal Reserve has sought to curb inflation, which has thrown cold water on the US real estate boom. While prices are falling on a month-over-month basis, they’re still significantly higher than a year earlier when the buying frenzy was going strong. Values were up 12.1% from a year earlier in August. The sharpest correction in August was in San Jose, California, down 13% from its 2022 peak, followed by San Francisco at almost 11% and Seattle at 9.9%, the company said. It’s not just buyers who are stepping away from the fast-cooling market. The doubling of rates has disincentivized would-be sellers from giving up the historically low rates they had previously locked-in. Inventory was on the rise from May to July but stalled in August, according to Black Knight.

US job openings plummeted in August by the most since early in the pandemic, likely a welcome sign for Federal Reserve officials as they seek to cool demand for workers without triggering a spike in unemployment. The number of available positions decreased to about 10.1 million in the month from 11.2 million in July, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Tuesday. The August level was lower than all estimates in a Bloomberg survey of economists. The 1.1 million decline in vacancies was the biggest since April 2020 and is consistent with moderating labor demand, reflective of shifting consumption patterns, rapidly rising interest rates and a darkening economic outlook. Stocks jumped while Treasuries advanced after the report, as traders grew optimistic the Fed may not have to be as aggressive with its interest-rate hikes given some signs that demand for workers is cooling. While the number of vacancies remains extremely high, the ratio of openings to unemployed persons retreated in August. There are some 1.7 jobs for every unemployed person, down from about 2 in July and the smallest ratio since November of last year. Fed policy makers have pointed to the elevated number of job openings as a way to cool the labor market without an ensuing jump in unemployment. The decline in vacancies may help temper wage pressures that central bankers are trying to tame in an effort to extinguish rapid inflation. Hires that were little changed during the month suggest some of the decline in vacancies reflected employers withdrawing job postings rather than filling them. The largest decreases in job openings were in health care and social assistance, other services and retail trade. Some 4.2 million Americans quit their jobs in August, a slight increase from a month earlier. The quits rate, a measure of voluntary job leavers as a share of total employment, held at 2.7%. Layoffs increased to the highest level since March 2021, though they remain historically low.

Growth at US service providers remained firm in September, reflecting solid business activity and orders, while a measure of prices fell to the lowest since the start of 2021. The Institute for Supply Management’s gauge of services softened to 56.7 last month from 56.9 in August, according to data released Wednesday. Readings above 50 signal growth and the figure was slightly firmer than the median projection of 56 in a Bloomberg survey of economists. While the measure of business activity, which parallels the ISM factory production index, and the new orders gauge both declined from the strongest readings of the year, they remained elevated. That suggests demand for services is healthy despite high inflation, rising interest rates and growing concerns about the economy’s prospects. Fifteen service industries reported growth in September, led by mining, other services, education and agriculture. The ISM’s index of services employment advanced to the highest level in six months, suggesting companies are having greater success hiring. The measure rose to 53 in September from 50.2, pointing to an easing of tight labor conditions that have driven up wages and contributed to inflation. A fifth-straight decline in a measure of prices paid by service providers adds to evidence of moderating cost pressures. The ISM’s index dropped to 68.7 last month, the softest print since January 2021. The report also indicated supply chains are continuing to normalize. Order backlogs fell to a four-month low and supplier delivery times increased at the slowest speed since February 2020. These were all good signs in terms of the prospect for a future easing of inflation – we hope the fed is paying attention to forward looking indicators as opposed to strictly looking in the rear view mirror.

Applications for US unemployment insurance rose by more than forecast last week, though remained at a historically low level. Initial unemployment claims increased by 29,000 to 219,000 in the week ended Oct. 1, Labor Department data showed Thursday. The prior week was revised down to the lowest level since April. The median estimate in a Bloomberg survey of economists called for 204,000 new applications. The rise in claims was just the third increase since the end of July. The four-week moving average, which smooths out volatile week-to-week moves, was little changed at 206,500. Continuing claims for state benefits edged up to 1.36 million in the week ended Sept. 24. The pickup in claims -- if sustained -- would suggest lackluster spending in various sectors and uncertainty about the economy’s prospects are prompting some businesses to lay off workers. That said, the level of applications remains low and continues to signal a robust labor market. Data out earlier this week showed job openings plummeted in August by the most since early in the pandemic, indicating some softening in labor market conditions. Layoffs remain limited, but a growing number of firms in recent weeks including Robinhood Markets Inc., Microsoft Corp., Tesla Inc., Netflix Inc. and Ford Motor Co. have announced dismissals or plans to cut jobs.

US employers continued to hire at a solid pace last month and the jobless rate unexpectedly returned to a historic low, indicating a sturdy labor market that puts the inflation-focused Federal Reserve on course for another outsize interest-rate hike. Nonfarm payrolls increased 263,000 in September after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, matching a five-decade low. Average hourly earnings rose firmly. The median estimates in a Bloomberg survey of economists called for a 255,000 advance in payrolls and for the unemployment rate to hold at 3.7%. Hiring was relatively broad based, led by gains in leisure and hospitality and health care. The figures are the latest illustration of the perennial strength of the US job market. While there have been some indications of moderating labor demand -- most notably a recent decline in job openings -- employers, many still short-staffed, continue to hire at a solid pace. That strength is not only underpinning consumer spending but also fueling wage growth as businesses compete for a limited pool of workers. The Fed, meanwhile, is hoping to see a significant softening in labor market conditions, with the goal of cooling wage growth and ultimately inflation. While the payrolls advance was the smallest since April 2021, policy makers are watching to see if their rate hikes spur an increase in the unemployment rate. The labor force participation rate -- the share of the population that is working or looking for work -- eased to 62.3%. The jobs report showed average hourly earnings were up 0.3% from August and up 5% from a year earlier, a slight deceleration from the prior month but still historically elevated. The solid increase suggests the Fed will have to continue to raise interest rates as it aims to rein in rapid wage growth that has bolstered household spending.

Interest Rate Insight and the Fed

Global stock and bond bulls were hoping the market impact of Australia’s dovish rate surprise will stick as it offers their best chance at arguing the worldwide wave of disruptive hikes is closer to the end than the beginning. Yields on rate-sensitive three-year Australian government bonds plunged by the most since 2008 after the central bank raised interest-rates by a less-than-expected 25 basis points on Tuesday. The unexpected move ricocheted around global financial markets, giving a fresh boost to the rally in Treasuries, pushing New Zealand yields lower and helping turbocharge a rally in Japanese equities. The Reserve Bank of Australia’s dovish surprise will be interpreted by some as a sign that the end is in sight to the wave of aggressive monetary tightening that has steamrolled global bonds and equities this year. Australia has acted as a lead indicator for at least the bond market since late 2021, when the RBA’s sudden abandonment of curve control sent local yields spiking.

“I think we are getting to the point where markets are pricing in peak rates,” said Ned Bell, chief investment officer at Bell Asset Management, a global equities fund manager based in Melbourne. “You will start to see the trajectory of inflation moderate and that should be a good sign that you’ll see similar moves from what we’ve seen from the RBA today. The magnitude of rate hikes will slow.” RBA’s surprise came after a Monday drop in a US gauge of factory activity suggested its economy may be faltering as we noted above. A growing cohort of investors are also scooping up bonds, with the likes of Citigroup Inc.’s Steven Wieting and JPMorgan Asset Management drawn by attractive valuations and growing bets for an economic downturn. Two-year Treasury yields fell about eight basis points to 4.03% at 5:23 am New York on Tuesday, adding to the 17 basis point decline on the prior day. The three-year Australian bond yield plunged 32 basis points, while the nation’s benchmark stock index rallied by the most since June 2020. “Central banks are grappling with inflation and other growth/leverage factors,” said Viraj Patel, strategist at Vanda Research. “More central banks will be taking it slow in Q4.” The RBA ended a streak of outsized increases, a result predicted by only a quarter of economists surveyed. Still, any global read-across is complicated by the fact that Australian policymakers are mindful of the indebtedness of their household sector and the prevalence of variable mortgage rates which means hikes are particularly impactful.

According to our esteemed Wharton professor Jeremy Siegel one of the big problems with the fed right now is there are 0 dissenting voices on the FOMC. In his words, varying opinions, discussion and diversity is both healthy and important and they have been sorely lacking in recent years. He has been a harsh critic of the Fed over the past two years and continues his argument these days. His concern is that with the current hawkish stance the fed will go too far – just as he indicated in 2021 they were being too slow to react to inflationary pressures. He was spot on then and ahead of most other economists. With everyone talking so tough and raising rates so rapidly with very little seeming concern of putting the economy into recession – then a recession could simply become a self-fulfilling prophecy. We would be inclined to agree – we would rather FOMC members spend less time at speaking engagements at economic forums discussing theoretical monetary policy or speaking on CNBC and more time in the real world visiting auto dealer lots and chatting with mortgage companies. For example, this week listening to Loretta Mester talking about interest rates not being yet in restrictive territory was - to put it politely – super annoying. Mortgage rates had actually surpassed briefly 7% last week – so our question is if that is not restrictive than what planet is she living on?!

To lend credibility to our argument, US mortgage rates jumped to a 16-year high of 6.75%, marking the seventh-straight weekly increase and spurring the worst slump in home loan applications since the depths of the pandemic. The contract rate on a 30-year fixed mortgage rose nearly a quarter percentage point in the last week of September, according to Mortgage Bankers Association data released Wednesday. The steady string of increases in mortgage rates resulted in a more than 14% slump last week in applications to purchase or refinance a home. Over the past seven weeks, mortgage rates have soared 1.30 percentage points, the largest surge over a comparable period since 2003 and illustrating the abrupt upswing in borrowing costs as the Federal Reserve intensifies its inflation fight. The effective 30-year fixed rate, which includes the effects of compounding, topped 7% in the period ended Sept. 30, also the highest since 2006. MBA’s index of applications to purchase a home plummeted 12.6% to 174.1, the lowest level since 2015, while the gauge of refinancing dropped 17.8% to a 22-year low. Need we say more!

Along those lines in yet more Fedspeak this week, the US central bank has not finished the task of bringing inflation down and is “quite a ways away” from pausing its campaign of interest-rate increases, Minneapolis Fed President Neel Kashkari said. “We have more work to do,” Kashkari said Thursday during a talk hosted by Bremer Financial Corporation. “Until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause. I think we’re quite a ways away from a pause.” Kashkari, who before the pandemic was known as the Fed’s most outspoken dove, has emerged this year as its biggest hawk. The Minneapolis Fed chief and his colleagues on the central bank’s rate-setting Federal Open Market Committee have been emphasizing that they won’t be deterred by turmoil in financial markets, which have been roiled by the fastest pace of Fed tightening this year since the early 1980s, as they seek to bring inflation down from four-decade highs. “I fully expect that there are going to be some losses and there are going to be some failures around the global economy as we transition to a higher-interest rate environment, and that’s the nature of capitalism,” Kashkari said. “We need to keep our eyes open for risks that could be destabilizing for the American economy as a whole. But to me, the bar to actually shifting our stance on policy is very high,” he said. “It should not be up to the Federal Reserve or the American taxpayer to bail people out.”

The FOMC, on which Kashkari sits but does not vote on policy decisions this year, has raised its benchmark rate by three-quarters of a percentage point at each of its last three meetings. It’s also signaled another 125 basis points of increases over the course of its remaining two meetings this year. The next gathering is Nov. 1-2. Fed officials have said a monthly Labor Department report on employment and wages due out Friday, as well as a monthly report on consumer prices due Oct. 13, will be critical inputs to the November rate decision. “Commodity prices move up and down, but underlying inflation -- like wages and services -- tend to be stickier,” Kashkari said. “We’re not seeing any evidence yet that those things are moving in the right direction.” His comments were a key contributor to the decline in stock and bond prices in early trading Thursday.

Impactful International News

Immigration to the US is rebounding after a sharp two-year slowdown, but the pickup is unlikely to plug the pandemic-induced gap in new arrivals amid persistent employee shortages in industries reliant on foreigners. Nearly a year after the US reopened its borders, non-American workers are flowing in at a pace just under that last seen in 2019, an analysis by University of California at Davis economics professor Giovanni Peri showed. But as of June, there were about 1.7 million fewer working-age immigrants living in the US than there would have been if immigration had continued at its pre-2020 pace, he said. About 600,000 of those are college-educated. “Unless we put more resources into processing this or we expand the number of visas, I don’t think we’re going to catch up,” said Peri. “We’re going to continue to grow, but not make up for this gap that we lost during Covid.” The once-in-a-generation labor deficit has seen US employers struggle to hire and keep employees over the past two years, with those in construction, hospitality, and services -- which all historically rely on a greater proportion of immigrants -- feeling more pain. The shortage of both US-born and foreign workers has also triggered higher wages across industries, adding more fuel to the hottest inflation seen in about four decades.

Canadian employment grew in September for the first time in four months, but gains remained moderate in a sign the labor market continues to be near full capacity. The country added just over 21,000 jobs last month, with small gains in both full-time and part-time work, Statistics Canada reported on Friday in Ottawa. That’s in line with the median estimate of a 20,000 gain anticipated by economists in a Bloomberg survey. The unemployment rate fell to 5.2% as the labor force shrank, reversing part of an increase in August. Hours worked fell 0.6% in September. The rise in employment ended three consecutive months of losses from June through August, during which the economy shed more than 113,000 jobs. The question now is how much of the slowdown is being driven by labor supply factors and how much by higher borrowing costs and weakness in underlying demand. The mix is important to the Bank of Canada, which has been tightening policy aggressively amid worries that demand for labor has far outpaced supply. Based on a speech Thursday by Governor Tiff Macklem, the Bank of Canada appears to see the labor market at or near full capacity. Macklem said the jobs market remained extremely tight, with wage gains broadening and underlying inflation pressures showing no signs of letting up. “The recovery was largely driven by a rebound in education jobs. So the gain in September can’t be viewed as a true reacceleration in employment,” said Royce Mendes, head of macro strategy at Desjardins Securities Inc. “Today’s report shouldn’t do much to alter the thinking of monetary policymakers.” The two-year benchmark yield on Canada bonds rose to 4.045% as of 9:07 a.m. Ottawa time, the highest level since November 2007.


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