The labor market shows signs of weakening

Stocks fell last Friday, giving up earlier gains, as traders got cold feet when “unexpected” Russian gas pipeline problems caused energy prices to spike. Signs that the labor market is cooling down eases the pressure on the Fed.

Workin’ it. It makes you feel dirty just thinking it. How could you possibly hope that the labor market weakens? Jobs, at the end of the day are how most of us pay the bills. Further, who wants to live in a world where you have to worry that your job may be in jeopardy? Well, sadly, that is the exact scenario which the Fed is hoping for. To speed along that process, the Fed is raising interest rates making it more difficult for companies to finance projects and for consumers to purchase products. Both of those lead to lower profits, which in most cases cause companies to consider job cuts… which by the way, is the easiest variable cost for companies to control. If higher interest rates are not causing you to slow down your consumption, the Fed’s tough talk should have you thinking twice about buying big ticket items. Oh, and what about this? The Fed is responsible for keeping the labor force…well, laboring, so when the Head Fed says that the US will have to sacrifice record-low unemployment in order to fight inflation, you might want to forego that new expensive TV for the upcoming football season out of fear that you may lose your job, and with the Fed essentially removing the safety net, maybe you should start reacquainting yourself with your old college friend the Ramen noodle. Ok, ok I am not writing this to scare you, but the reality is that the Fed IS making all those overtures to get all of us to reduce demand and allow inflation to ease up.

As you may have noticed, all that tough talk has taken its toll on capital markets over the past 12 months or so. Higher interest rates are bad for growth stocks (it’s a finance thing, you can read about it hear in my monthly newsletter:  Why are my growth stocks falling? ) and a lower revenue growth is bad for growth, value, or…all stocks, actually. An angry Fed is bad for shorter-maturity bonds, and high volatility combined with prolonged inflation is bad for longer-maturity bonds. One final thing; the Fed is also happy that your portfolio is so volatile and that its value is shrinking. Scary thought, but in fact, true. Investors with shrinking portfolio values consume less, and everyday folks consume less when they hear that stock markets are struggling, even if they don’t own stocks. I am assuming that you picked up on the theme here. The Fed really, really wants you to freeze your credit cards in a block of ice and shove that cash deep under your mattress (don’t actually do that – you can earn a really decent return on short-term Treasuries these days). In other words: stop spending so much money. I am assuming that you already knew all this as I have been writing about this for many months now. Given that we are all on the same page, one BIG question still remains. When will the Fed back off its consumption busting behavior? We have been rightly assuming that the Fed will slow down its hiking and hawk talk when either one or both of these occur. The economy implodes into a spiraling recession or inflation shows signs of abating. The Fed’s preferred scenario would be for prices to come down and for the economy to slow substantially without stalling...a little of both. For the latter condition to occur, the recently hot labor market would have to cool down. Last Friday’s monthly employment figures gave us…and the Fed an important data point on the labor market. What we learned is that the Unemployment Rate unexpectedly rose to 3.7% and that Average Hourly Earnings were unchanged but expected to have expanded. Now, these may appear to be subtle, but they are important signs that the Fed’s work is starting to bear fruits. These numbers are also in sync with recent reports that a growing number of companies are not only halting hiring but also beginning to lay off workers.

Knowing all this, will the Fed take pride in its work and slow down the hiking process? The past 2 inflation data points show inflation easing slightly and we are expecting one more print of the Consumer Price Index / CPI next week where prices are expected to have contracted by -0.1% for the month. Also, up next week are Retail Sales figures along with University of Michigan Sentiment numbers. Those will surely be considered by the Fed, along with a spate of housing numbers, leading up to the FOMC’s policy meeting in 2 weeks. What the central bankers do and what they say will set the tone for markets going forward. Right now, Fed Funds futures are predicting a +50 basis-point hike with a 66% chance of a 75 basis-point bump-up. Cuts are not expected until at least next May.

FRIDAY’S MARKETS

Stocks gave up early significant gains on Friday after Russia failed to turn on the Nord Stream pipeline causing energy prices to spike. The S&P500 lost -1.07%, the Dow Jones Industrial Average gave up -1.07%, the Nasdaq Composite Index dropped by -1.31%, and the Russell 2000 Index declined by -0.72%. Bonds gained and 10-Year Treasury Note yields lost -6 basis points to 3.18%. Cryptos advanced by +0.30% and Bitcoin lost -0.51%.

NXT UP

• S&P Global IS Services PMI (August) may have been revised up to 44.2 from flash estimates of 44.1.
• ISM Services Index (August) is expected to have declined to 55.5 from 56.7.
• Later this week: we will get the Beige Book and the weekly job numbers (those are becoming increasingly important in light of last week’s monthly numbers). Chairman Powell will speak tomorrow. Please refer to the attached economic release calendar for times and specifics.