Market Note – November 7, 2022

By Hightower Great Lakes on November 8, 2022

New Nonfarm Payrolls and Job Openings; Fed Rates Higher for Longer

Last week, we received a windfall of economic data, along with the Fed announcing another 75 bps rate hike.

Summarizing Chair Powell’s comments, there are certainly concerns that inflation has become entrenched.

Entrenched inflation is a consequence of a few things: $6 trillion in fiscal and monetary policy programs put in place over the past three years, which has led to the persistently tight labor market, higher wages, higher rents and widespread price hikes across other service industries.

The tight labor market gives the Fed conviction to continue their restrictive policy, reflecting their dual mandate to support price stability and maximum employment.

Here’s a recap of the jobs and economic data we received last week:

New Nonfarm Payrolls

• In October, 261,000 new nonfarm payrolls were well-above expectations, and the September figure was revised upward to 315,000.
• October’s new nonfarm payrolls was 41% higher than October 2019 (pre-pandemic).
• Year-to-date, new nonfarm payrolls have fallen at an average -1.45% monthly rate.

Job Openings

The latest September job openings figure was 4% higher than August and 51% higher than September 2019 (pre-pandemic).

Year-to-date, job openings have fallen at an average -4.9% monthly rate.

Unit Labor Costs

• Nonfarm unit labor costs increased at an annualized 3.5% pace in Q3. This is higher than the 10-year average 2.67% quarterly, annualized rate.
• Labor costs have risen at a higher pace than the 10-year average for the past six consecutive quarters.

Initial Claims and Unemployment Rate

• The unemployment rate increased to 3.7% in October, off its 50-year low 3.5%.
• The four-week moving average for initial claims continues to be a strong predictor of the overall unemployment rate.
• The unemployment rate is down -12% y/y, and initial claims are down -25% y/y.

ISM Services/Manufacturing

• Institute for Supply Management (ISM) surveys are leading indicators and, broadly, economic activity continues to expand from these series.
• Within the manufacturing sector, survey respondents have indicated slowing order growth, easing supply chains and lower prices.
• Within the services sector, the survey indicates resilient consumer demand, healthy volumes, tight labor availability and inconsistent supply chain improvements.
• The prices component within manufacturing has fallen sharply, while service prices remain elevated and quite sticky.
• (The survey is a diffusion index, where levels >50 represent expansion and levels <50 represent contraction).

If the Fed is successful in bringing down inflation to 2%, there is likely to be rising unemployment and less hiring/jobs available.

But the opposite has been the case, as seen from several series last week such as JOLTs (job openings), ADP, initial jobless claims and the nonfarm payrolls report.

The tight labor market is a product of expanding economic activity and healthy consumer balance sheets from wage growth and elevated savings, which also contributes to inflation.

With the Fed’s “higher for longer” monetary policy, there is rising risk for a 2023 recession, but this policy is necessary to bring down inflation, which poses a far greater risk in the long run.

2023 remains a wild card for the growth of the U.S. economy – but whether it’s a recession or simply slower, growth will likely be lower vs. 2022. That said, the market is a forward-looking indicator and already anticipates this, with the SPX down 20% YTD. 

Fixed Income Reaction

Treasury yields continued their months-long trend, surging higher throughout last week. Front-end yields outpaced the long-end, driving the 2s/10s spread inversion to finish at -51bps.

Mid-week, we saw the largest inversion, at -61bps, and you’d have to go back to the early 1980s to see that reading again (when it troughed at -200 bps). The 10-year is now yielding 4.15% while the 2-year is yielding 4.67%, both at their highest levels since 2007.

Chair Powell’s remarks at Wednesday’s FOMC meeting hinted of a possibly slower pace to rate hikes, but he essentially slammed the door on any near-term pivot or pause.

Yields jumped as market participants continue to digest the Fed’s determination, despite best efforts by Chair Powell to make this clear in his communications.

Municipals outperformed, as yields were actually down 1-3 bps across the curve, and continue to slow play the higher move in Treasury yields.

Correspondingly, Muni/Treasury ratios have now moved to the richer side, with the 2, 5, 10 and 30-year ratios at 67, 74, 82 and 98%, respectively.

Taxable spreads continue to show signs of shrugging off recession fears as Investment Grade tightened by 7 bps to +176 and High Yield closed the week unchanged at +473.

The Week Ahead

Earnings – Tuesday: FANG, DIS. Wednesday: DHI, OXY, WYNN.

Economics – Thursday: CPI (October).

Return for Selected Indices²

Click here to read last week’s Market Note (10/31).

SOURCES

¹ Source: FactSet (charts) as of November 4, 2022

² Source: Bloomberg as of November 4, 2022

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

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This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.