This week we saw the Fed drop a (tiny) hint it may start lifting its foot off the economy. Now we see a jobs report showing continued wage and employment growth. Put those together and it may look like the fabled “soft landing” is possible. Peter Boockvar isn’t convinced.

Key Points:

  • US payrolls grew 261,000 in October with upward revisions to prior months.
  • The unemployment rate rose to 3.7% as the labor force shrank slightly.
  • Average hourly earnings growth seems to be slowing, but this is partly due to tougher comparisons against strong growth a year ago.
  • Leisure/hospitality and education/health saw notable job growth, while construction seems to be flatlining.
  • Job growth, while still strong, is definitely slowing from the 12-month average of 442,000.

First, this report continues a string of generally lower monthly job numbers:

“Smoothing out the monthly volatility puts the 3-month payroll average at 289k vs the 6-month average 347k, the 12-month average of 442k and the 2021 average of 562k. Thus, the slowing trend is now obvious…” (h/t Peter Boockvar)

Second, government jobs were half the upside surprise. When looking at the Household Survey, we see LOSSES of 328K, and get this…those aged 45 to 54, which are prime earning years, had LOSSES of 406K. This shows a reluctance to hire and a willingness to cut more costly employees.

Boockvar doesn’t think this report will change the Fed’s calculation and the unemployment rate will exceed 4% soon. This in turn will cause the rate hikes to end… if something else doesn’t do it first.

 

US Economy

 

  • Household consumption remains resilient despite the headwinds, with spending rising again in September.
  • Robust spending means more hikes from the Fed and rates remaining higher for longer. Economists now see the terminal rate at 5%.
  • Savings as a share of disposable income continue to trend lower.

 

 

  • Pending home sales are down 30% from a year ago.

 

 

  • The Treasury curve moved deeper into inversion territory last week, with the 3-month yield now above the 10yr

 

 

  • Regional manufacturing indicators paint a grim picture of factory activity at the national level.
  • The MNI Chicago PMI:

 

 

  • Goldman’s latest forecast has the Fed hiking rates by 75 bps this week, followed by 50 bps in December and two 25 bps hikes in February and March. Forecasts are now converging at the terminal rate of 5% (some groups, such as Deutsche Bank, made this call much earlier).
  • CEOs’ economic expectations have deteriorated.

 

 

  • Job openings unexpectedly increased in September, pointing to persistent strength in the labor market.
  • The Fed would like to see the openings-to-unemployment ratio closer to pre-COVID levels, but it’s not budging for now. This does not look like a signal to “pivot.”
  • Manufacturing production is growing again.
  • Supply stresses are gone.
  • Order backlogs (now declining):

 

 

  • Input prices are now falling, surprising to the downside.

 

 

  • That’s good news for consumer inflation.

 

 

  • Used car prices are in deflation territory.

 

 

  • The GDPNow model has the Q4 GDP growth at 3.6% (annualized), …

 

 

  • The terminal rate (peak fed funds rate) continues to climb as the market expects the Federal Reserve to maintain pressure for longer.

 

 

  • The peak has now shifted all the way to July of next year.

 

 

The Fed

 

Bond guru Mark Grant points out something few have noticed. The Fed is about to face negative cash flow as the interest it pays on bank reserves exceeds the interest received from its shrinking bond portfolio. This will mean smaller rebates to the Treasury and maybe some other, less predictable effects.

Key Points:

  • This week’s FOMC meeting and likely 75-point rate hike will mean more pain in the housing market but not end there. All financing costs will keep rising.
  • The Fed’s mandate is “price stability,” not just inflation. Its policies are taking stability off the table.
  • Officials may hint at a pivot in December, but we will see two more employment and two more CPI reports before then.
  • In 2021 the Fed handed $109 billion in interest back to the Treasury. This number will now shrink quickly and force Congress to find other revenue.
  • Fed policy may well bring inflation down over time, but the cost could be worse than it is considering.

Mark is sticking with his out-of-consensus view that the Fed’s inflation cure is worse than the disease itself. Certainly neither is good. Inflation is having harmful effects, but so are the policies the Fed is using to fight it.

The Fed hiked rates by 75 bps as expected.

 

 

The FOMC statement hints at smaller rate increases ahead. The wording “cumulative tightening” suggests a focus on the terminal rate rather than individual rate increases. The market initially saw the reference to monetary policy “lags” and “economic and financial developments” as a bit dovish.

 

Market Data

 

  • Most of the recent earnings downgrades have been in growth stocks.

 

 

  • It’s been a really bad year for Treasuries.

 

 

  • Gold has experienced the worst losing (monthly) streak since 1869.

 

 

Quote of the Week

 

 

Picture of the Week

 

Scottish Castle Tigh Mohr Trossachs

 

 

All content is the opinion of Brian J. Decker