November 5, 2021
The jobs numbers this morning confirmed what should be a reasonable assumption: When you stop paying people to stay at home, they will go find a job.
In this case, from July forward, more than half of the states have rejected the federal unemployment subsidy. And while the August and September job growth came in under expectations, those numbers have since been revised UP. And this morning's October numbers came in better than expected.
So, averaging the job growth over the past six months, we get 665k jobs added a month. That's big. And that's on an unemployment rate that came in this morning at 4.6%.
That's more than three times the job growth underway when the Fed started normalizing rates back in 2015. And a lower unemployment rate (currently), by 40 basis points.
Add to this, today the health czars are touting the trial success of another oral therapeutic against Covid.
This should all signal a sustained, strong economic recovery, which should be a greenlight for stocks, commodities and interest rates (yields).
Check, for stocks and commodities. But yields went the wrong way today, sharply.
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As you can see in the chart, there was a lot of bond buying today (price goes up, yield goes down), despite the positive news on the economy and on the pandemic front. And the move in yields was global. European yields were down sharply on the day too.
Not only that, but gold had one of its best days of the year (only 12 days better) — finishing on two month highs.
And the vix was up 5% on the day, despite broadly positive stocks.
Bottom line: It looks like there is some hedging of risk going into the weekend.
Perhaps there is some fear of an ugly unwind, of some of the bubbly tech stocks that have done so well in the pandemic period. This one comes to mind …
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November 3, 2021
The Fed announced the beginning of the end of QE today. And the plan looks very much like the plan we discussed in my Monday note. They will cut their monthly bond buying program in equal amounts, to end in June of next year.
This "tapering" plan is coming earlier and with a faster timeline than they led us to believe, up to about this summer.
And this timeline opens the door for the possibility of a mid-year rate hike.
But in his press conference this afternoon, Jay Powell wouldn't go anywhere near a discussion on the liftoff of interest rates.
His subdued tone on inflation and the rate outlook was/is fuel for stocks. As such, stocks traded to another new record high.
In his press conference, Powell danced around the scrutiny over the interest rate outlook, justifying the Fed's position by pointing to the labor situation, and the uncertainty surrounding the forces that are driving inflation (will they abate?).
On that note, he had more uncertainty introduced overnight. The gubernatorial elections in Virginia and New Jersey may have changed the policy winds on Capitol Hill. These proxy votes on the radical and disruptive policies of the democrats, should only embolden the intraparty resistance to the "big spend" agenda.
As we've discussed in past notes, at this stage, a smaller deal, or (even better) a no deal, would be among the best outcomes for markets and the economy. It would be a relief valve on inflation pressure. And it would remove the obstruction of uncertainty on a recovering economy that already has $5 trillion of excess money floating around.
November 2, 2021
Stocks close on yet another new record high today. Yields traded lower. And commodities were mostly lower.
This, as the big Fed decision will come tomorrow.
And this, as global government and corporate leaders are meeting in Scotland on the global climate action agenda.
So we have two competing forces at work here.
The Fed, and other global central banks are ending emergency policies, which will then lead to a normalization of global interest rates, at best. At worst, it will turn into an aggressive rising interest rate environment (i.e. an inflation fighting campaign).
Simultaneously, global governments are pledging to fund the green energy transformation. In the face of record global indebtedness, they will be doing more deficit spending, just as funding debt and deficits is likely to become more and more expensive (with rising interest rates).
Is it a collision course for sovereign debt defaults?
Not if they (global governments and central banks) are all coordinating/ cooperating. And they are (for the moment).
To be sure, they will borrow and spend. But we may find that central banks do not aggressively raise rates to combat inflation. As we've discussed in prior notes, they may let higher prices resolve the "higher prices problem." That means we will be left to deal with a very hot period of inflation, until the consumer finally capitulates and stops consuming.
In the meantime, the global reset of prices (higher) will continue to reset the value of economic output, higher (i.e. higher nominal GDP). And that will start shrinking global debt/gdp. This was the strategy all along, from the outset of the pandemic policy response: inflate away debt, and the value of the money in your pocket.
October 29, 2021
We close the week, and month, with stocks trading to new record highs.
But it's not the risk-on, feel good market that a record high in the S&P 500 might suggest. Especially ten months into a year, where stocks are up over 20%.
For perspective, six of the eleven S&P 500 sector tracking ETFs finished down today. The small cap index (Russell 2000) closed down on the day.
Yields were unchanged on the day. Moreover, for a stock market that was up 6.9% for October and closed on new record highs, the 10-year yield traded, at one point today, unchanged for the month!
These are market interest rates, and should be rising with a recovering economy, especially given that the Fed is due to begin reversing emergency policies next week. The intermarket behavior seems out of synch with the economic and geopolitical picture.
With the above in mind, we have a lot of events over the next few days, that will influence markets. The G20 meeting is over the weekend, which will blend into a global climate summit. I would expect this to be an opportunity for the top countries in the world, which have already committed to the climate action cause, to make the "climate crisis" case to the world.
The U.S. is positioned to lead the way with a big fiscal spend in the name of energy transformation. And in the face of record global sovereign indebtedness, I wouldn't be surprised to see the top countries in the world vow to follow the U.S., with massive deficit spending plans to fund the climate agenda.
The big question is, how will it all be paid for? Will it ultimately (and maybe soon) come in some form of a global currency devaluation?
