The sticker shock of a jobs number almost twice the expectation hit markets hard when it was released, but early sell-offs were soon reversed, with Nasdaq up by 1.5% in early afternoon trading. The economy continues to prove its resilience to the Fed’s rate increases, which probably means that rates will rise again. On the bright side, demand and profits should be robust. Bond yields rose sharply after the jobs report but fell back by midday. Fed fund futures are currently trading on 37% odds of another rate hike by December, up from 20% a week ago.
Bottom line: risk-on.
TODAY’S MAJOR NEWS
Stronger jobs market, but wage growth under control
The economy created 336,00 jobs in September, more than double the 170,00 expected by analysts. August numbers were revised up by 40,000 to 227,00 jobs created. It’s generally believed that the birth rate adds about 100,00 workers per month to the workforce, so we continue to add jobs to the economy at a much faster pace than we do workers, and that pace appears to be picking up once again. The unemployment and job participation rates were unchanged at 3.8% and 62.8%, respectively.
Wage growth provided a silver lining. Average hourly earnings rose 0.2% month-on-month in September, matching last month’s gain but below analyst expectations of 0.3%. Average hourly earnings rose 4.2% year-on-year in September, below the 4.3% forecast and down from 4.3% last month. Wage inflation, a vital part of the “super-core” inflation followed by the Fed, may have ticked slightly lower. Still, it remains well above levels needed for overall inflation to get to the 2% mandate, which won’t be helped by many of the labor strikes in the current work environment seeking significant wage increases.
Bond bear market benefits equity exposure
One feature of the sharp rise in bond yields that often goes overlooked is the portfolio losses this brings to the pension funds and insurance companies that are significant holders. Bloomberg reports that since March 2020, Treasury bonds with maturities of 10 years or more and 30-year bonds have fallen in price by 46% and 54%, respectively. This bear market ranks alongside the worst equity markets have experienced and the worst bond period since 1981 when the 10-year yield rose to 16%. Some commentators have pointed out that fixed-income investors have been diversifying into equities to avoid this sell-off. This is a mixed blessing: providing support for equities until bond yields rise to levels when traditional buyers switch back from equities to bonds.
Ukraine war escalates, further threatening grain markets
The war continues escalating in the Black Sea, with Russia now discussing nuclear testing in press conferences. Russia hit a café in a northeast city in Ukraine yesterday, killing 51 people, further angering Ukrainian officials. A cargo ship hit a mine believed to have been placed by Russia as it moved towards a Ukraine port. Ukraine is still a major grain exporter, but its contribution to world markets is shrinking, putting pressure on commodity prices.
Ukraine exported 6.9 million metric tons (MMT) of grains and pulses in the first quarter of its marketing year, down 2.7 million from the previous year’s pace. That included 3.5 MMT of wheat and 2.8 MMT of corn. An increasing number of ships are lining up to move to and from Ukraine ports through its humanitarian channels, leading to a steady barrage of attacks on port infrastructure by Russia, gradually reducing operational capacity at the ports. Meanwhile, exports via land routes increase progressively once again as agreements are reached to move grain west.
Currently, the market doesn’t care a great deal, as the world is adequately supplied by cheap wheat from Russia following two bumper crops and by corn from Brazil following a record crop there. It would make a big difference if shipments from Russia were curtailed. The odds of that remain low, but those odds slowly creep higher as the war lingers and escalates.
TODAY’S MAJOR MARKETS
Nasdaq bounces back despite rate fears
- Nasdaq bounced back, up 1.5% at midday after an earlier sell-off. The Russel 2000 and S&P 500 were up 1.0% and 0.9% respectively
- Foreign markets were mixed overnight, with the DAX and FTSE 100 up 1.4% and 0.6%, respectively, and the Nikkei 225 was off 0.3%
- The VIX, Wall Street’s fear index, rose to 17.6 (having touched 19.7 in morning trade)
Bonds rally after immediate sell-off, dollar pulls back
- 10-year yields traded up six basis points to 4.78%, and 2-year yields rose to 5.07% but were both off more sharply after the jobs report
- The dollar index fell 0.2% to 106.2
- Versus the dollar, Sterling and the Euro were up 0.4% and 0.3%, respectively, while the Yen was down 0.5%
Oil and gold rally after recent profit-taking
- Crude oil prices rallied after recent profit-taking, up 0.5% to $82.7 per barrel
- Spot gold prices rose 0.6% to $1,844 per ounce, while silver rose 3.1% to $21.7 per ounce
- The grain and oilseed complex are mostly weaker ahead of an active harvest weekend
- Soybeans lead the sector lower with active seasonal harvest pressure a factor, along with negative chart signals
- Selling returned to the corn and wheat markets after prices were unable to sustain a test of Thursday's highs, which were mostly a product of chart-related short covering by speculative traders
Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]
Market outlook by Paul Walton, Financial Writer: [email protected]
