October 5 – Stock futures had a mixed tone to them this morning, after finishing Wednesday’s session well, but traders are focused on tomorrow morning’s monthly jobs report that has the opportunity to confirm a softening jobs market, which might open the door for a pivot in monetary policy by the Federal Reserve. The VIX is trading near 19 this morning, after pulling back from its five-month high near 21 yesterday. The dollar index is trading near 106.7, after coming off of Tuesday’s 10-month high near 107.3. Yields on 10-year Treasuries are trading near 4.73%, while yields on 2-year Treasuries are trading near 5.03%. Crude oil prices are more than 1% lower in follow through liquidation, while the grain and oilseed markets are mixed to weaker. Wheat prices are consolidating higher, while corn and soybean prices face seasonal weakness as the harvest comes in – perhaps a bit better than expected thus far.
First-time claims for unemployment benefits rose modestly to 207K in the week ending September 30, up from 205K the previous week, but down from analyst expectations of 210K, and still at historically low levels. This dropped the four-week moving average to 208.75K claims, down from 211.25K the previous week. Continuing claims for the week ending September 23 dropped 1K to 1.664 million, after the previous week’s number was also dropped by 5K. That resulted in the four-week moving average dropping by 5K to 1.668 million claims, which is also a historically low number. The labor market remains quite tight. Yesterday’s ADP report reflecting signs of possible softening in the jobs market, which could be the beginnings of easing wage inflation, but traders want to see tomorrow morning’s government jobs report for confirmation. On a related note, today’s Challenger job-cut report showed that announced corporate layoffs dropped to 47,457 in September, down from 75,151 the previous month, which again shows a sense of stability in the workforce, rather than a softening of it.
Recession or soft landing for the economy? That’s been the debate. Wall Street continues to pin its hopes on a soft landing, because the recession anticipated for the past year and a half simply hasn’t happened. It hasn’t happened largely due to the lingering fiscal stimulus in the economy, but that has also prevented the inflation rate from falling back to the Federal Reserve’s 2% mandate. Those advocating for a soft landing believe that wage inflation can be brought down sufficiently for overall inflation to hit the 2% target by employers simply holding onto existing employees while not adding more positions. That’s a great theory, and there is some evidence to support it. Yet, I remain skeptical that the U.S. economy is structured in a way to allow that to happen. As such, I still believe that at least a mild recession is needed to hit the 2% target, particularly with energy prices trending higher.
Rising Treasury yields create added headwinds for the economy, contributing to the recession risk. The Fed has received the bulk of the blame for rising Treasury yields, but something else is at play currently, as I’ve been warning for months. Investors are dumping bonds as they anticipate a much larger supply of them in the months ahead, including investors from China and Japan – our two largest foreign holders of U.S. debt certificates. The bond liquidation pushes yields higher, raising risks for the economy. Why the expectation of a big increase in bonds? Our federal government continues to spend beyond its means – now borrowing money to pay the interest on its debt, in addition to its rapidly growing debt. The federal deficit is up 156% over the past year due to lower capital gains, smaller salary bonuses, larger tax refunds, and a 10% increase in government spending. The U.S. Treasury is expected to increase the offerings of debt certificates at Treasury auctions by an average of 23% across the yield curve in 2024, requiring the market to push yields higher to attract sufficient buyers to absorb the increased supply. The resulting higher yields are expected to put a squeeze on private sector credit, reducing investment funds available for the private sector development. That can lead to a recession, while fueling higher costs for doing business, which has implications for the commodity markets.
Seasonal weakness is again the theme in the corn and soybean markets this morning, while wheat continues to consolidate near recent multi-year lows. Corn and soybean yields are currently coming in better than was expected a month ago, leading to ideas that this year’s crops may be a bit larger than first thought. We still could see problems emerge with later-maturing crops, but the trade is growing more comfortable that the supply will be larger enough to handle this year’s weaker demand. USDA should provide greater insight next week when its updates its balance sheets, but the bulls lack a story currently. Weekly export sales for corn and soybeans were much better in this morning’s USDA data dump, but we need to see this sustained for an extended period of time to raise hopes of a better demand picture. Next week’s USDA report should provide a lot of answers about the size of this year’s crops. Meanwhile, chances for rain in dry areas of Brazil’s Center-West area are improving for the days ahead, which should encourage a pickup in the planting pace if those forecasts verify.
