October 4 – Stock futures are modestly higher following this morning’s private sector jobs report that raised hopes of a pivot by the Federal Reserve. The VIX is trading near 20 at this hour, after reaching a fresh five-month high near 21 earlier in the session prior to this morning’s data release. The dollar index is trading lower near 106.6 as Treasury yields pull back. Yields on 10-year Treasuries are trading near 4.76%, after posting a fresh 16-year high above 4.88% earlier in the session, while yields on 2-year Treasuries are trading near 5.10%. Crude oil prices are 2% lower at this hour, with selling accelerating on this morning’s data that suggested a slowing economy. Grain and oilseed prices are mostly lower in early trade.
The private sector added just 89K jobs in September, according to this morning’s ADP report. That’s down from 180K jobs created in August, and below analyst expectations of 150K jobs created. Traders pay more attention to the government’s monthly jobs report, which will be out on Friday morning. The correlation isn’t always the best between these two reports, but the ADP report often gives us an indication of the trend that we can expect to see in the government report. The Bureau of Labor Statistics reported that the economy created 187K jobs in August. Analysts expect that number to drop to 160K for September in Friday’s report. Today’s ADP report suggests that we may see an even larger drop in job creations, albeit with the unemployment rate ticking lower to 3.7%.
Why is this important? The Federal Reserve is focused on “super-core” inflation, which is the service sector minus shelter. Labor costs are one of the primary drivers of this super-core sector. As such, getting super-core inflation low enough to bring overall inflation down to the Federal Reserve’s 2% target means that it must slow down the employment sector by bringing the number of job openings into balance with the number of workers seeking a job. Employers post fewer job openings if they’re worried about slowing consumer spending. Higher unemployment rates mean that more people are looking for jobs. The object is to bring the job openings to number of workers seeking a job closer to 1:1, after it was near 2:1 in the post-pandemic recovery. That ratio is currently closer to 1.5:1, but this morning’s ADP report suggests that we may be drawing it even lower, pending Friday’s data. On a related matter, analysts expect Friday’s jobs report to show that average hourly earnings are up 4.3% year-on-year, unchanged from the previous month, which would suggest that wage inflation remains a problem.
Kevin McCarthy was ousted as Speaker of the House in the Republican controlled House of Representatives on Tuesday after eight Republicans joined Democrats in a no-confidence vote. The move has the attention of Wall Street, because it demonstrates the power that these eight conservative Republicans have in the nearly evenly split House, similar to reflecting the power held by a few moderate Democrats in the Democratic held Senate. The power of the few typically leads to disruption of the status quo, which can sometimes be good, and sometimes not so good. It means that we likely can expect more drama in Washington when it comes to fiscal policy, with the potential for greater differences between House and Senate spending bills. The first real test of that will likely come in mid-November when the current stopgap funding bill expires, again threatening a partial government shutdown, as the eight conservative House members battle for more fiscal restraint. This may certainly play out as drama in the headlines, but the longer-term impact that we need to be monitoring is in the Treasury market, with implications for the equities and for the commodities as well.
Crude oil prices fell to fresh three-week lows this morning following the jobs data suggesting a slowing economy, combined with headlines suggesting rising supplies. Industry chatter suggests that Russia may be close to easing export restrictions on diesel exports, while Turkey suggests that the Kirkuk-Ceyhan pipeline may be operational later this week, adding nearly 500K barrels per day to the supply of crude oil on the global market. This represents some of the ebb and flow of market psychology, allowing for a pullback in prices following a strong run to 10-month highs. Grain and oilseed prices are similarly weaker in early trade today. Corn prices turned back from the upper side of their recent trading range in chart-related and seasonal trade, whereas soybean and soymeal prices bounced very modestly following recent sharp losses. Wheat prices are notably lower after this week’s short-covering rally lost momentum as Russia continues to sell record volumes of wheat at cheaper prices. The dollar pulled back today, but the overall strength of the dollar combined with economic fears amid high Treasury yields continues to create headwinds for the commodities lacking a strong story.
