With the debt ceiling drama taking an intermission, and the anticipation of the strong jobs report coming tomorrow, global markets (and the global risk picture) were broadly positive today.

As we’ve discussed, the employment recovery has looked very good (at a 5.2% unemployment rate) — getting closer to the long-term average unemployment rate.  Add to that, the unemployed in half of U.S. states have now lost additional federal unemployment pay, and should be moving back into the work force — likely to be represented in this data we’ll see tomorrow morning. That means we should see a good report/ lower unemployment.

And we know, not only has the headline inflation rate been running well north of the Fed’s target level, but the wage component in these jobs reports has been running hot.  We don’t need to see it in a government report.  We can see it all around us.  Employers are short of labor.  And employees are commanding a higher wage, and getting it.

Throughout the post-financial crisis era, when the Fed was trying to produce some inflationary pressures (to avert the deflation threat), what was the one piece that wasn’t materializing for them?  Wage growth.  Now we have it.

So while the supply chain disruptions will, at some point, abate.  Higher wages will stick. That’s a tailwind for inflation.

Higher energy prices are driven by a structural supply shortage (not bottlenecks).  That’s sticky.  That’s a tailwind for inflation.

With the above in mind, the Fed’s dual mandate of price stability and full employment clearly doesn’t justify emergency level policies.

So, a strong report tomorrow will further validate the Fed’s plan to officially change-the-direction of monetary policy at their November 3rd meeting.

All of this said, if we look forward by a month or two, the question is: how will the Fed react if/when the unemployment starts to move back up, due to vaccine mandates? They may not taper for long.
 

In recent days, we’ve seen a persistent climb in energy prices — to new record highs by the day.  

And we entered today with that burden of the building energy crisis, combining with a politician-imposed deadline on raising the debt ceiling.

With that double whammy, stocks were sniffing around the lows of this recent correction this morning.

But by the afternoon, stocks had bounced aggressively (almost 2%), thanks to some well placed promises.

On the energy front:  After Dutch natural gas prices jumped 60% in two days, Russia said it would send record amounts of natural gas to Europe this year.  That was liberally interpreted as a promise.  Global energy prices dropped.

On the debt ceiling front:  As the President was hosting a meeting with some of the biggest corporate and banking leaders, laying out the consequences of a debt default to the American public, the other side (the Republican Senate) stepped up and floated an offer that would extend the debt ceiling deadline to December.  Stocks rallied.

Now, every time U.S. debt is brought into the crosshairs we can expect the politicians to leverage the situation, and to use every chance they have to posture in front of cameras, insulting our intelligence with scare/doom and gloom debt-default scenarios.

But in the post-global Financial Crisis and Pandemic era, we have plenty of visibility on this perceived disaster scenario.  We’ve seen the movie before.

Keep in mind, when a potential default in Greece threatened to destabilize the world, the major economic powers of the world stepped-in, providing support for Europe — helping to finance their rescue facilities and support the euro.

The takeaway:  Within this crisis era, they (the major economies of the world) are all on the same team.

Not only will foreigners not dump our Treasuries, they will buy our Treasuries.  In fact, even today, as this “default scenario” was being bandied about, the price of the 10-year Treasury was rising, as it did in the two debt ceiling dramas of the past ten years.

It all boils down to this:  The world’s governments and central banks (led by the Fed) crossed the line in the sand, in response to the financial crisis.  They all went all-in. They told us explicitly that they would do anything and everything to maintain stability and confidence in global markets.  That hasn’t changed.  In fact, the backstop powers have been wielded to a far greater extent in the pandemic response.

So, for perspective, a self-inflicted wound to the biggest economy in the world, that would destabilize global markets and threaten the global economic recovery, is highly unlikely (not going to happen).