Amidst signs of a cooling economy buoyed by waning inflationary pressures, a still-robust labor market continues to underpin the “no-landing” thesis. While third quarter corporate earnings reports would seem to suggest tepid revenue growth and a fair amount of margin pressure, equity markets remain fully valued. Also, bond yields have surged, accompanied by rising interest rate volatility. The market appears to have done the Fed’s job for it, and may lead to an extended pause by the FOMC.
On the labor front, the September JOLTS Job Openings report showed a higher than expected 9.55 million job vacancies, up from the prior month’s 9.49 million. This follows September’s jobs report indicating nonfarm payrolls expanded by a stronger than expected 336k. The Unemployment Rate held steady at 3.8%. Average Hourly Earnings rose by +0.2% MoM and +4.2% YoY. Continuing Claims for the week ending 10/26 came in at 1,790k, reaffirming an upward trend to the data.
As to the economy, Q3 GDP came in at a stronger than expected +4.9% YoY, with Personal Consumption up by 4.0%. With the U.S. consumer representing approximately 2/3 of the U.S. economy, we continue to think the odds for a hard landing remain slim as long as employment holds up.
The latest ISM Manufacturing reading for October came in below expectations at 46.7, suggesting a contraction in that area is under way. The ISM Employment reading fell below consensus at 46.8 while the ISM New Orders survey also missed the mark at 45.5. In contrast to manufacturing, the preliminary reading of the October S&P Global US Services PMI report came in at 50.9, suggesting a marginally expanding services sector.
Inflation remains sticky, although at a far lower level than a year ago. CPI for September rose +0.4% MoM (+4.1% YoY), while ex-food & energy, consumer inflation rose +0.3% MoM and +3.7% YoY. At the wholesale level, prices rose +0.5% MoM and +2.2% YoY. Stripping out the volatile food and energy sectors, prices rose +0.3% MoM and +2.7% YoY.
The Federal Reserve concluded its meeting as we go to press and they left short-term interest rates unchanged. As mentioned, the marketplace has seen bond yields rise by 100 basis points over the past couple of months, effectively doing the FOMC’s job for them. All eyes and ears will be on the language in the meeting statement, determining whether the Fed is done for good, or whether this is just a temporary pause in the upward trajectory of interest rates.
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