Russell 2000 leads equity rally as bond yields fall further

The small-cap and value-oriented Russell 2000 index rose 3.0% as the belief that interest rates have peaked gathered supporters. Bonds rallied strongly, lowering 10-year yields back to early autumn levels. The dollar fell against all major currencies. Oil continued its decline.

Bottom line: Risk-on.

TODAY’S MAJOR NEWS

Markets believe rates have peaked

This week’s economic data suggests that the economy is now slowing down. Today’s disappointing jobs data for October, with 101,000 reductions for August and September data, is good news for the ‘peak rate’ hypothesis. Weak manufacturing data was reported in Europe, China, and the US.

Fed fund futures place 10% odds of a rate hike by January this morning, down from 40% one month ago, and the market is now pricing in expectations of the Fed’s first rate cut, or a pivot in policy, by the central bank’s May meeting. Traders will doubtless start to speculate on rate cuts in the New year.

Coupled with the ‘Halloween Effect’ we mentioned earlier this week, in which equity market returns average 8.5% for November through April, this could set up equity markets for a bullish scenario over the next few months. If the economy tips look liable to tip into recession, calls for rate cuts will become a crescendo.

Disappointing jobs data

• The economy created 150,000 jobs in October, less than the 180,000 forecast, but the real story was downward revisions to prior months
• September data was revised to 297,00 jobs created, down from the 336,000 originally reported last month
• August data was also revised down to 165,00 jobs created, down from the 227,00 originally reported
• The private sector created 99,000 jobs in October, less than the 143,000 forecasts and down from a downwardly revised 246,00 private sector jobs created in September
• The manufacturing sector lost 35,00 jobs in October, versus 14,000 gained in September

Rising unemployment rate

• The unemployment rate ticked higher to 3.9% in October, rather than unchanged as expected
• It’s interesting to note that recession follows every time the three-month moving average of the unemployment rate rises 0.50% above the annual low (the so-called Sahm Rule). Today’s 3.9% print means that the three-month moving average has risen 0.4% above its lows; an employment rate north of 4.0% will officially trigger the Sahm Rule and an ensuing recession
• The labor participation rate ticked lower to 62.7% during October
• The survey revealed that there are 6.5 million people unemployed in America, up roughly by 849,000 from the low in April
• The portion of that group that has been unemployed for 27 weeks or more was little changed at 1.3 million people, accounting for 19.8% of the larger unemployed group
• The survey revealed that 4.3 million of the unemployed didn’t even look for a job in the previous four weeks, or they were “unavailable” to work

Modest earnings growth

• Average hourly earnings were up 4.1% year-on-year in October, above the 4.0% expected, but down from the 4.3% posted in September
• Average hourly earnings rose 0.2% month-on-month in October, less than 0.3% expected and less than the 0.3% growth posted in September

TODAY’S MAJOR MARKETS

Russell 2000 rallies on small cap, value buying

• The Russell 2000 rose 3.0% today as traders bought lagging value stocks, with Nasdaq up 1.6% and the S&P 500 up 1.2%
• Foreign equity markets were mixed, with the Nikkei 225 up 1.1% and the FTSE 100 and Dax down 0.4%
• The VIX, Wall Street’s fear index, fell back to 15.3 (the year’s low was 13.0)

Bonds yields and the dollar fall

• 2- and 10-year yields fell sharply to 4.88% and 4.55%, respectively – emphasizing the market’s view that official rates might have peaked
• The dollar index fell 1.1% to 105.0
• Versus the dollar, Sterling was up 1.5%, the Euro was up 1.%, and the Yen was up 0.8%

Oil slips further

• Crude oil fell 2.0% to $80.8 per barrel
• Spot gold prices rose 0.5% to 2,002 per ounce, while Silver rose 2.1% to $23.3 per ounce
• Money chased the grain and oilseed sector, helping December corn hold above its September low, helping January soybeans hit buy stops above overhead chart resistance
• Wheat also became more competitive on the world market with the break in the dollar

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]