This week crude oil hit multi-year highs, and consumers are now feeling it in gasoline and other fuel prices. This chart looks at crude’s two-year history. You can see the sharp plunge as the coronavirus struck, with WTI approaching zero at one point. Crude was back in the $40 range by summer 2020. Now it’s doubled in the last year.

 

 

This is related to the shipping rates we saw in the previous chart. Crude oil is the main component of transportation fuel: gasoline, diesel, jet fuel, etc. Rising demand for those products drives crude prices higher. Moreover, the fuel has to be in the right place at the right time, adding another level of complexity. Supply chain snarls both reduce fuel supply and raise fuel demand, and it’s all happening after years of low capital investment in the sector, plus pressure to reduce carbon emissions. It’s a sticky wicket.

 

Poverty Lines

 

This map shows US poverty by state. The colors indicate the percentage of each state’s population below the federal poverty line. The least-impoverished state is New Hampshire while Mississippi is the poorest. But as with inflation and other stats, this raises measurement issues. For one, it doesn’t consider cost of living. High-cost places like California and Hawaii may have more struggling residents than their poverty rate suggests. Nevertheless, the map shows yet another way in which the US remains sadly divided.

 

 

The Fed

 

Tight labor markets and indications of higher wage inflation further boosted expectations for the pace of Fed rate hikes. The market now sees a 70%+ probability of two hikes next year.

 

 

China

 

Let’s begin with the real estate sector credit crunch.

 

 

Investors continue to dump developers’ bonds. Below is Kaisa.

 

 

We have a distressed debt exchange.

 

 

Even some of the less vulnerable names are under pressure.

 

 

 

 

 

 

And even the High Yield index for ALL of China has shown stress.

 

 

Thermal coal prices hit a new high today amid falling inventories and strong demand for electricity.

 

 

 

 

Tech shares in Hong Kong (testing resistance):

 

 

US Economy

 

  • At first glance, the September payrolls report looked hugely disappointing.
  • The difference is due to weakness in teacher hiring, which on a seasonally adjusted basis looks like a significant loss in government jobs.
  • The rest of the job growth disappointment was attributed to the Delta variant spike. But there is more to the story. The report shows an ongoing tightening in the labor market and accelerating wage growth. It is certainly not weak enough to derail the Fed’s taper plans.
  • The participation rate declined, contributing to labor shortages.

 

 

  • Of course, the labor market recovery has a long way to go

 

 

  • Here is a comparison to the post-2008 recovery.

 

 

  • We have the September employment leaders and laggards.

 

 

  • The first full rate hike is now priced in for November of next year.

 

 

  • The probability of two rate hikes next year is now above 65%.
  • The 10yr inflation swap rate (inflation expectations) hit the highest level since 2013.
  • Container shipping costs:

 

 

  • Chip prices:

 

 

  • The NFIB small business sentiment index ticked lower in September.
  • Labor shortages became even more acute last month.
  • A record share of businesses are boosting wages and plan to keep doing so in the months ahead. The cost of labor is becoming more of a problem.
  • Americans are quitting their jobs at a record pace. The quits rate and the absolute number of voluntary resignations hit a record high.
  • The percentage of firms planning to raise prices keeps climbing.
  • Business outlook continues to deteriorate.

 

 

  • New vehicle prices continue to surge.
  • Rent and owners’ equivalent rent (OER) CPI rose sharply.
  • Finally, we have a forecast for the CPI (year-over-year) from Oxford Economics.

 

 

  • The Department of Energy estimates that heating costs for households will be 30% higher this winter.
  • Electricity costs will increase at a faster rate.
  • Social Security beneficiaries will get a 5.9% inflation adjustment boost next year.
  • Americans will spend more during the holiday season this year
  • Producer prices surprised to the downside. The core PPI excluding trade services (business markups) increased only 0.1% last month.
  • As with the CPI report, airline fares were a drag on the PPI.
  • Jobless claims keep trending lower.
  • Childcare has become less of an issue for some working parents as in-person schooling returns.
  • Mortgage rates are back above 3%

 

Market Data

 

  • US crude oil is trading above $80/bbl for the first time since 2014.
  • The 50-day moving average now acts as resistance for the S&P 500.

 

 

  • Fewer analysts are upgrading corporate earnings globally.

 

 

  • Stocks remain inversely correlated with the US dollar.

 

 

  • Poor internal participation has knocked the S&P 500’s McClellan Summation Index below zero for the first time in over a year. That was one of its longest streaks since 1926.
  • Profit warnings picked up last quarter.

 

 

  • Market professionals see an additional 5-10% decline in the S&P 500 before the year-end (according to a Deutsche Bank survey).

 

 

  • US earnings beats have probably peaked.

 

 

  • The Optimism Indexes for the stock and bond markets have declined to low levels. It’s unusual to see them decline at the same time, at least to this degree.
  • Global earnings downgrades are about to overtake upgrades.
  • The G3 credit impulse suggests that stocks will underperform bonds next year.

 

 

  • Share buybacks continue to surge.

 

 

  • The top 10 stocks in the S&P 500 contribute about 30% of total earnings.
  • Here is the distribution of negative-yielding debt.

 

 

  • Over the past 90 days, the U.S. dollar has jumped more than 4.5%. But commodities have bucked their typical correlation and not only also rallied, but doubled the gain in the dollar.
  • The S&P 500 hitting resistance at the 50-day moving average.

 

 

Thought of the Week

 

The Quote M Uses in No Time To Die…at the end

“The proper function of man is to live, not to exist. I shall not waste my days in trying to prolong them. I shall use my time.” The quote is by American author, journalist Jack London.

 

Pictures of the Week

 

 

The number of hours of physical exercise per week (globally):

 

 

 

 

All content is the opinion of Brian J. Decker