Why This Week Matters to You – Labor Market Stronger than Expected Amid Fed Decision


Equity Market Gets A Boost from the Labor Market

Last week, markets were boosted as the change in nonfarm payrolls came in much better than expected. 157,000 jobs were added in October while the estimate for the month was only at 85,000, per Bloomberg. It’s also noted that the 157k was better than the average for the rest of the year, which sits at 137,000. September jobs were also revised up from 136,000 to 180,000. That partial explains the rally on Friday, which saw the NASDAQ and S&P hit all-time highs.

It should be noted that not all the data from Friday was positive, although it was overshadowed by the jobs report. Bloomberg’s Consumer Comfort Index suffered it’s “biggest weekly decline in more than eight years”. The index surveys the public on their perspective on the economy, personal finances and the buying climate. Bloomberg notes that the decline could signal tempered spending in the upcoming holiday season.

The comfort also showed a disparity in the data between tax brackets. Those earning less than $50,000 annually were down by the most in their records, which date back to 2010. For those earning more, the sentiment was little changed. This shows a glimpse into the dichotomy of how Americans are enjoying the current expansion. Stocks are hitting all-time highs, but that only benefits those that have enough discretionary income to invest in the market. The difference between the two groups will be an interesting measure to watch, especially as we quickly approach the election, where issues of economic disparity have been an important talking point amongst Democratic candidates.

The above graph shows initial jobless claims (red), Michigan Consumer Sentiment Index (green) and the Consumer Comfort Index (purple) mapped back to 1995. Readings in all categories are particularly strong and are near highs (Consumer Comfort and Michigan Consumer Sentiment) or lows (initial jobless claims), respectively. If taken at face value, these are positives. The worry amongst investors is how long can this prosperity last?

It’s an interesting place to be in where the Federal Reserve is lowering interest rates while unemployment and initial jobless claims are near 50 years lows, consumer sentiment is seemingly so high, and stocks are hitting all-time highs. Lowering interest rates is usually a practice reserved for times of economic contraction. Although the economy is certainly slowing and data has been mixed, there’s been pockets of weakness rather than broad-based systemic weakness. Although it’s encouraging to see the Fed being proactive rather than reactive, historically they have been somewhat off (to put it lightly) when it comes to predicting future recessions or preventing them.

Next week, a slew of economic data that we’ll be analyzing closely includes the following:

  • Durable Goods Orders (Monday)
  • Factory Orders (Monday)
  • Market US Services PMI (Tuesday)
  • Market US Composite PMI (Tuesday)
  • ISM Non-Manufacturing Index (Tuesday)
  • Trade Balance (Tuesday)
  • Initial Jobless Claims (Thursday)
  • Bloomberg Consumer Comfort (Thursday)
  • University of Michigan Sentiment (Friday)

Federal Reserve Cuts Rates for the Third Time in 2019

On Wednesday, in a move unsurprising to the market, the Federal Reserve cut rates for the third time this year. This most recent cut moves the Fed Funds Rate range to 1.50-1.75%. As we stated last week, the market had over a 90% probability that rates were going to be cut. The guidance was also unsurprising, as Federal Reserve Chairman Jerome Powell all but confirmed the Fed’s stance that there would be a “pause” in moving interest rates from the current level. “The current stance of policy is likely to remain appropriate,” Powell said in his post-meeting press conference.

The decision was seemingly vindicated based on the data that came out Friday on the labor market, particularly when you factor in the GM strike which was supposed to hurt the numbers. Subsequent Fed speakers have been parroting Chairman Powell’s remarks following the press conference (See: Vice Chairman Richard Clairda, Federal Reserve Bank of New York President John Williams). As such, markets don’t see a cut happening in the next two meetings; currently, Bloomberg implied probabilities on cutting rates for the meetings on December 11th and January 29th stand at 16.5% and 41.6%, respectively. Numbers don’t tick above 50% until the meeting on March 18th, to 53.7%. Additionally, the market only sees one cut as likely in 2020 as the probability for the range to be cut to 1-1.25% by the December 16th, 2020 meeting currently stands at 27%.

It’s important to note that these numbers are simply predictions and the future is clear as mud. Two of the biggest banks in the world, JP Morgan and Goldman Sachs, were forecasting four rate hikes in 2019 as recently as December 1st, 2018. Data changes and times change, there are still plenty of global slowdown risks as well as trade risks on the horizon. Brexit fears are tempered, but sentiment can change on the flip of a coin. China and the US have announced a “Phase 1 deal” to end their trade spat, but markets were selling off as recently as Thursday on fears that it wouldn’t go through. The message to take away from Wednesday is that right now, there’s no need to cut but the Fed will remain poised to make a move.

Phase 1 Deal

The US and China are seemingly inching closer to signing the first part of a trade deal. President Donald Trump indicated last week that negotiations were “ahead of schedule.” The deal, as described by the President will be a “very big portion of the China deal” and will “take care of the farmers”. The proposition that the deal was nearing completion sent the Dow to an all-time high on Monday.

Farmers have been a fixture of the debate around the trade spat between China and the US. They were targeted in tariffs by the Chinese hoping to put pressure on the President’s 2020 hopes, knowing they were a large portion of the constituency that got him elected him 2016.

Previously there was an expectation that the deal would be signed at the upcoming Asian-Pacific Economic Cooperation Summit in Chile. Chilean President Sebastian Pinera announced last week that the summit would be canceled due to widespread protests regarding the government’s “neoliberal policies and high cost of living”, per NPR.

A new potential location for signing the deal is a small state in the Midwest: Iowa. Trump suggested Friday that the deal could be signed in Iowa, a state that has been hit hard by tariffs during the ongoing war of tariffs between the two superpowers, per Reuters. Signing the deal in Iowa would be symbolic not only in the sense that it would relieve pressure on a state that’s been put under pressure during the trade war but also in a political sense. Iowa is an important campaign state for Presidential candidates and the first state to primary. Notably, it was the first state Donald Trump won on his way to the White House in 2016.

It remains to be seen whether Xi would agree to signing the deal in Iowa, or even in the US. Trump indicated that he would like to sign the deal in the US and when asked if Xi would sign in the US he responded, “He would too.

Interesting Reads

“The Making of the World’s Greatest Investor” by Gregory Zuckerman, WSJ

Jim Simons is an investor that no one has heard of (outside of the finance world). Simons extraordinarily produced average annual returns of over 66% for his Medallion fund since 1988. He’s overperformed the financial gurus of the world like George Soros, Steven Cohen, Warren Buffett and Ray Dalio with ease. The article is an adaptation of the upcoming book “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution”, which I’ve pre-ordered. The article is a taste of the book that releases on November 5th.

-Jesse Wilkins


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