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Daily Capital

Markets: ‘Jolts’ in the Labor Market

Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

November 8–14

Ba da-da da-da da-da…Feelin’ GROO-O-O-O-O-VY!

If you’re of a certain age, you probably recognize that lyric. In fact, if you grew up hearing it on your parents’ radio like I did, it’s now almost certainly stuck in your head for the rest of the afternoon. (You’re welcome.)

Apologies to Simon & Garfunkel, but their 1970s-era earworm hit seems to capture the sentiment among the millions of workers who keep stepping away from their jobs in droves almost perfectly. The so-called quits rate – released last week as part of the now very closely followed Job Openings, Leavings and Turnover Survey[1] (aka “JOLTS”) – showed that 4.4 million Americans were feeling groovy enough about the labor market to simply walk away in September. That’s another all-time record from a data series that recently seems to enjoy setting all-time records.

But think about how confident you’d have to be to quit your job right now. After all, that once-in-a-generation pandemic that we all thought was ending has proven to be nothing if not stubborn. Meanwhile inflation – the markets’ new and shockingly powerful boogeyman – seems to be just as persistent as the virus and all its variants. And that re-opening we’re all enjoying? Well, it’s still underway, but governments worldwide are struggling with ideas on how best to combat rising infection and hospitalization rates without completely undermining the economy again.

To be sure, the decision to leave one’s job right now is not entirely unreasonable. After all, job openings are still more plentiful than the number of people looking for jobs, so at least some of those who are simply setting down their tools and walking out are probably pretty confident that they’ll be able to simply stroll next door and find a new gig without much trouble. But those who haven’t already made the decision to walk might want to consider this: one segment of the economy that is feeling decidedly less groovy are businesses. Witness the fact that the NFIB’s latest survey of small businesses, released last week, showed that business owners on net are more pessimistic about the direction of the US economy over the next six months than they have been in almost a decade[2]. Uncertainty is spiking, too, and while those same small businesses are still desperately trying to hire, it’s fair to wonder how durable those staffing plans will be if all that pessimism eventually proves to have been warranted.

For their part, consumers are also feeling a little less groovy than all those job-leavers, too (which is odd, considering that those quitters are also consumers and vice-versa…). But still, the good folks at the University of Michigan, who released their latest read into consumer sentiment last week[3], have noticed that all this inflation that markets are so pre-occupied with is starting to take a very real toll on consumers. The UofM’s November mid-month survey fell by a much wider-than-expected 4.9 points to its lowest level in a decade, zigging when in fact economists thought it would zag (the average analyst thought the figure would actually improve slightly.)

The culprit? Inflation and the lack of an official plan to combat it[4]. And putting an exclamation point on the whole episode, Ann Arbor’s famous survey-taking professors also said that one in four respondents report that living standards were being hurt by inflation, while more people volunteered their frustrations about rising prices for homes, vehicles and durable consumer goods than at any point in the last 50 years. (For the record, 50 years ago is almost exactly when Simon & Garfunkel were enjoying so much success with their grooviest hit song. Coincidence? Probably, but still…)

So let’s quit beating around the bush. How bad is inflation? Well, last week’s data release from the Bureau of Labor Statistics showed that producer prices are 8.6% higher than they were a year ago.[5] (Yep, you read that right – not a typo.) But that’s old news. Businesses have been complaining about nosebleed prices for a year or more, and economists have listened: last week’s PPI data was more or less in line with what they had expected.

But as eye-popping as an 8.6% jump in the PPI might be, it was really consumer prices that grabbed all the attention. The CPI was up 0.9% last month, matching June’s post-pandemic high and leaving the year-over-year increase at 6.2%[6]. The so-called core CPI index – which ignores things like food and energy (phssst…who needs those?) – was somewhat less eye-popping, at 4.6%. But all those numbers were still significantly higher than expected (and enough, apparently, to make consumers a little freaked-out, according to the UofM’s take, discussed above.)

So yeah, inflation is dominating the narrative right now. Why? Well, it’s probably not because markets are worried that the Fed will boost the pace of the taper significantly, or even pull forward the date of “lift-off” (when, at some point in our lifetimes, the Fed lifts the funds rate off the zero floor.) That fear has largely receded, as evidenced by a lack of any massive market move in the wake of the Fed’s decision earlier this month to begin weaning the US economy off QE (quantitative easing)[7]. Also telling was the relatively tame behavior of fed funds futures markets last week[8]. But markets might be worried about a policy error by the Fed in the longer-term, whereby it fails to move aggressively enough (or, conversely too aggressively,) to combat inflation in the future. In that context, last week’s move of approximately +0.10% in treasury rates at both the 2- and 10-year maturities – much if it immediately after the CPI data was released – might be the most notable market-related data point in that it suggests investors are very clearly paying attention, even if a dramatic change of course by the Fed is not thought to be in the cards over the near-term.

But for my money, it’s the consumer and his/her reaction to rising prices that really holds the key to market sentiment right now. If they still believe that prices will settle back down to that quaint and comfortable zone where the biggest worry was that inflation might be persistently too low (remember those days?) then all that worry might be for naught. But if inflation continues to take a bigger and bigger bite out of living standards then consumers are prepared for, well then, things might not be so groovy after all.

What to Watch This Week

November 15– 21

Notable economic events (November 15–19)

Monday: Empire State Manufacturing

Tuesday: Retail sales, industrial production, NAHB, WMT earnings

Wednesday: Housing Starts/Permits, TGT earnings

Thursday: Weekly jobless claims, Philly Fed, BABA earnings, AMAT earnings

Friday: No economic events planned

Above, I argued that one of the main reasons inflation still matters to markets now that the Fed has successfully communicated its tapering plans is how accelerating prices might continue to influence consumer behavior. If consumers are truly willing to set aside fears of inflation and continue to behave rationally, then we should see a robust – but also not mind-blowingly huge – increase in holiday sales. A significant deviation on either side of that could raise questions, and this week will provide an opportunity to test that idea when retail sales, together with a whole host of retail earnings releases, will dominate the calendar.

First up is Tuesday’s retail sales report from the Census Department. Always interesting, this report details how much (and where) Americans are spending their cash. And, as the final retail sales report before the holiday shopping season starts in earnest, it will set the bar for the most important selling season on retailers’ calendars. But this month’s data will be especially interesting because it will accompanied by a whole host of earnings reports by some of the biggest retailers in the world, including Target, Home Depot and Walmart (which, as we’ve reported here before, represents a startlingly large portion of total retail sales nationwide). Watch those reports for any color on foot traffic, spending, and any other metric that suggests how crazy this year’s holiday celebrations are likely to be.

For globally-minded readers, Chinese online marketplace Alibaba’s report on Thursday could be particularly interesting for at least two reasons: first, Alibaba’s earnings report could provide further insight into exactly how heavy-handed China’s ongoing official interference into its own companies’ operations has become, which is one macro-related trend that could emerge as a significant driver of investor sentiment during the new year. But of more immediate importance could be any comments by management about the just-completed Single’s Day in China – which has emerged as the biggest one-day shopping frenzy in the world. The failure or success of the first Single’s Day since COVID began to recede in earnest might provide a window into how holiday sales might progress in countries that follow Judeo-Christian gift-giving traditions.

Beyond retail, this week represents the first installment of this month’s housing data, beginning with the National Association of Home Builder’s housing market index – an excellent view into how the country’s homebuilders are feeling – on Tuesday. Then on Wednesday, the Census Bureau will release its monthly look into housing starts and permits. While both could be important as a glimpse into where still-stretched housing inventories are headed, the housing market’s significant cooling-off is well-known by now, likely relieving some of the attention housing data will get this week and next.

Similarly, the first two regional Fed manufacturing reports (Empire State on Monday and Philly Fed on Thursday,) are also likely to be non-controversial. Both will probably remain volatile, with manufacturers continuing to complain about input costs, labor market disconnects, and the usual list of stresses that have been on their minds over the last year or so. Only a deviation from that script would likely be relevant to markets.

Finally, the most notable one-off on the calendar this week promises to be Tuesday’s industrial production report, which details how the “old-economy” sectors such as manufacturing, mining and utilities are performing. Key to that release in my view will be the so-called utilization rate, which details the percentage of productive capacity that was utilized over the last month. While the figure tends to be volatile, it’s notable that utilization has begun to hook down after just barely touching pre-pandemic levels a few months ago. If the economic recovery currently underway is to outlast all the supply chain disruptions, cost pressures and labor market disconnects, a recovery in utilization could be a strong, positive signal.

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[1] https://www.bls.gov/news.release/jolts.nr0.htm

[2] https://assets.nfib.com/nfibcom/SBET-October-2021.pdf

[3] http://www.sca.isr.umich.edu/

[4] Ibid.

[5] https://www.bls.gov/news.release/pdf/ppi.pdf

[6] https://www.bls.gov/news.release/pdf/cpi.pdf

[7] https://www.federalreserve.gov/monetarypolicy/files/monetary20211103a1.pdf

[8] See data at cme.com

Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Thomas Nun, CFA, is a portfolio strategist for Great-West Investments.
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