September 05, 2023

Cooling employment in time for cooling temperatures

Stocks had a mixed close on Friday after monthly payrolls data showed a cooling off in the labor market. Bond yields ticked higher holding back growth shares… and the Nasdaq.

Labor delivers. The Fed has made no secret of its intention to weaken the US labor market. I have to admit that it pains me to write those words despite my knowledge that they are true. Confident and happy people are happier yet to throw down their credit cards on elaborate, Instagram-worthy vacations and nearly empty their entire bank accounts to pay sky-high rents. Confident and happy is almost always dependent on employment. Therefore, with unemployment so low by historical standards combined with historically high job vacancies, folks are… well, happy to throw caution to the wind with their finances and ignore overly inflated prices. SO THE THEORY GOES, and all kidding aside, it does make sense. That said, the Fed, eager to curb those hungry, inflation bolstering consumers, has targeted that source of confidence and happiness, the labor market, hoping to cripple it in hopes of abating that happiness, and the spending.

Here is the plan. You kill the labor market by first punishing employers… companies, who in difficult market conditions, lay folks off and cut their hiring. You then hit consumers with a knockout punch by raising their expenses even more by causing their borrowing costs to go up. The end result is supposed to be kids moving out of high-rent apartments and moving into parents’ basements and foregoing expensive omakase sushi dinners for frozen waffles and Aunt Edna’s ambrosia salad from the back of the refrigerator. That is the way you force landlords to lower rents and cause sushi restaurants to add lower-cost noodle soup back to their menus. Of course, this is an extreme illustration, but the appearance of clouds on the horizon is supposed to cause everyone to pull back on the spending and allow price inflation to moderate. There is one final step in my extreme example. Tired of eating stale Cheerios and peanut butter and jelly sandwiches, unemployed workers should be more willing to accept lower wages to get back into the workforce, which should lower employers’ costs, allowing them to lower prices.

While the Fed is waiting for inflation to dissolve, it would, therefore, naturally, monitor labor market strength for early signs of progress. This is why investors may appear to be even more interested in jobs numbers than inflation itself. The problem heretofore is that the labor market has remained stubbornly strong and wages stubbornly high. This past Friday’s employment numbers, however, gave us the first clues that the Fed’s strategy is starting to work. Though still low by historical standards, US U-3 Unemployment Rate came in at a higher than expected 3.8%. Though new Nonfarm Payrolls came in slightly higher than expected, a downward revision of last month's numbers made the increase a non-event. Finally, Hourly Earnings, aka labor costs, came in lower than expected and lower than July’s number. Frankly, that is precisely what the Fed would have liked to see. And with that, Fed Funds futures adjusted to factor in just a 38% chance of a +25 basis-point rate hike before the end of the year and the first meaningful rate cuts somewhere in early spring of next year. That can’t come soon enough as the average shelf-life of ambrosia salad is shorter than one would expect, but Eggo waffles , according to Kellogg's, can maintain their freshness for up to 4 months in the freezer… but we know that they can last even longer .

EARLY MORNING MOVERS

Viatris Inc (VTRS) shares are higher by +2.78% in the premarket after the company received tentative FDA approval for oral suspension HIV treatment for HIV-positive children. Dividend yield: 4.44%. Potential average analyst target upside: +15.0%.

Stryker Corp (SYK) shares are higher by +1.18% in the premarket after B of A upgraded the stock to a BUY and raised its price target. B of A cited stronger margins following an increase in post-pandemic procedures. Dividend yield: 1.03%. Potential average analyst target upside: +11.1%.

LAST FRIDAY’S MARKETS