November 2 – Stock futures pointed higher overnight, as traders react positively to Wednesday afternoon’s statements from the Federal Reserve. The VIX fell to a fresh three-week low to trade near 16 this morning, after collapsing this week on easing concerns. The dollar index gapped lower to trade near 105.9 this morning as Treasury yields broke lower. Yields on 10-year Treasuries are trading near 4.65% this morning, after falling to nearly three-week lows earlier in the session, while yields on 2-year Treasuries are trading near 4.93%, after setting fresh eight-week lows. Crude oil prices are 1% higher after selling interest dried up near yesterday’s lows, while the grain and oilseed sector was mixed in early trading.
First-time claims for unemployment benefits rose to 217K in the week ending October 28, up from 212K the previous week, and above analyst expectations of 213K. This increases the four-week moving average to 210K, up from 208K the previous week. Continuing claims for the week ending October 21 rose by 35K to 1.818 million, with the four-week moving average rising by 36.5K to 1.758 million. Both the weekly and the continuing claims numbers remain relatively low, but they are clearly trending higher in recent weeks, suggesting a softening jobs market. We’ll get better data on that tomorrow when the government releases its monthly jobs report. Yesterday’s JOLTS report showed an increase in job opening postings, but that data was from September. Things seemed to have taken a turn in the jobs market in October. Even so, this morning’s Challenger Job-Cut report reflected notices to layoff jut 36,836 employees, down from 47,457 the previous month, and a relatively low number.
Non-farm productivity rose at an annualized rate of 4.7% in the third quarter, up from 3.6% in the second quarter, and above analyst expectations of 4.2%. Unit labor costs fell at an annualized rate of 0.8% as a result of the increased productivity, versus analyst expectations that they would rise by 0.7%, and versus the 3.2% gains seen in the second quarter. This suggests a softening labor market, as employers utilize technology to increase efficiencies to reduce labor costs, and as labor increases productivity as people worry more about keeping their jobs – all signs of a slowing economy.
All is well on Wall Street after the Federal Reserve provided enough subtle hints to traders that we may have seen the last of the rate hikes for this cycle. The Fed certainly did not say that, while leaving the door open for another hike, but that’s basically what the market heard on Wednesday. In fact, Fed Chair Jerome Powell tried his best to sound hawkish, but the markets weren’t buying it. The Fed continued to hold its benchmark interest rate at 5.25 – 5.50% at this week’s meeting, while continuing its pace of unwinding its balance sheet. Yet, Powell’s comments were perceived to be dovish, sending Treasury yields tumbling, with the dollar following them lower. Powell insisted that policymakers are not yet even considering rate cuts, but the market is doing so, with this morning’s data adding fuel to the speculation. Powell did acknowledge that higher longer-term rates and the strong dollar are doing much of the work for the Fed, although those factors certainly turned lower following his comments. The Fed no doubt took yesterday’s JOLTS job openings report into consideration, as well as yesterday’s weak manufacturing data, along with Wednesday’s Treasury refunding announcement showing an increase in debt certificate offerings over the coming quarter. Those factors generally supported a pause, while increasing the chatter of when the first rate cut will come. That, Powell stated, will hinge on whether policymakers feel confident that we will see inflation move down to the 2% mandate.
The lingering problem finally starting to get attention though is the impact of the rapidly rising national debt, and its impact on the sale of Treasury notes. This comes at a time when Japan is unwinding its yield curve controls. Japan is our biggest foreign buyer of U.S. debt certificates, but it, along with China and the Federal Reserve are decreasing purchases as the supply of the certificates increases. That tends to support higher yields to attract buyers. The question now is, does the average baby-boomer feel more comfortable following this week’s developments, increasing his/her willingness to shift money from the equities to Treasuries, filling a portion of that need for new buyers of debt certificates, or is the current drop in yields following yesterday’s Fed meeting merely a correction in an otherwise rising rate environment?
Good rains continue to be in the forecast for dry areas of Center-West Brazil this weekend, although confidence beyond that is waning somewhat this morning. This weekend’s rains, if they come, could be what is needed to get the crop off to a good start, although follow-up rains will be needed. They don’t need to be normal rains – they can be 60 – 70% of normal and still raise a good crop, but rains are needed, nonetheless. StoneX Brazil’s customer survey raised its soybean production estimate to 165 million metric tons yesterday, up from 164 mmt the previous month, reflecting confidence in the crop to this point. Our team noted that the weather will need to cooperate to achieve that estimate, but it continues to have greater concern for the safrinha corn crop that will be planted several months from now.
