The U.S. Economy Created 134,000 Jobs in September, Well Below 270,000 Estimate… Hurricane Florence disrupted employment for several hundred thousand people, distorting the jobs report.
What it means – With the hurricane, the headline number is almost meaningless. But there is some meat in the details. The unemployment rate ticked lower, from 3.9% to 3.7%, and the jobs numbers for July and August were revised higher by a total of 87,000. Earnings increased for the month by 0.3%, but the annual gain eased from 2.9% to 2.8%, as expected. Overall, this report won’t change anything, but it will be interesting to compare the gain in earnings to inflation, which comes out next week.
On an odd note, the Bureau of Labor Statistics’ birth-death adjustment, which the agency uses to guesstimate jobs created or lost to unreported businesses, came in at minus 67,000. This implies that the jobs number would have been over 200,000 without the BLS adjustment.
U.S. Bond Yields Marching Higher… The 10-year Treasury bond yield jumped from 3.05% early in the week to 3.20% before dropping back a bit. The 30-year Treasury bond yield also jumped, topping 3.30%. Investors pushed up rates after Fed Chair Jerome Powell commented that the central bank would most likely push rates above the neutral rate, and that such a rate is a “long way” from here.
What it means – In the financial world, everything is relative. That’s the only way to explain why a 0.15% change in interest rates would cause investors to come unhinged. On its face, this is a little change. But in contrast to where we’ve been, this is big stuff. The 30-year Treasury last hit these levels in the summer of 2014. For the 10-year, we’ve not seen these levels since 2011. With the Fed raising rates after holding them near zero for most of a decade, it makes sense that we’d see longer interest rates tick higher. The question is, how far do they go, and what do higher rates mean for equities?
We’re on record calling for rates to pop and then drop, as we expect higher rates in front of an economic slowdown that will drag them lower. For equities, higher rates are a bad sign. They give investors a chance to lock in marginally better returns than they’ve seen in years, which gives them an alternative to high-flying stocks.
August Factory Orders Up 2.3%, Driven Higher By Aircraft… Aircraft orders rose 69%, including defense aircraft up 17%. Excluding transportation, factory orders rose 0.1%.
What it means – Core capital goods orders dipped 0.9% last month after strong gains in June and July. It’s going to take a couple of months to separate signal from noise.
Are we at the point where the effects of the tax reform start to fade, or is this simply a temporary slowdown after orders ramped up in August? We’ve likely seen a near-term peak in business spending. Companies must integrate their new purchases into their operations and determine what else they might need.
If business orders move sideways or turn down, expect GDP growth to dip as well.
Oil Prices Higher as Iranian Sanctions Take Hold… Oil inventories increased, but investors were more concerned about sanctions on Iran, which are expected to cut the country’s oil production by another 500,000 to 800,000 barrels per day in the weeks and months ahead.
What it means – Inflation, anyone? As the U.S. imposes sanctions on Iran and the Venezuelans commit economic suicide, oil prices should move higher. The Saudis announced their plans to make up any production losses, but that remains to be seen.
As oil prices move higher, everything costs more. In addition to pain at the pump, we pay more for shipping, farming, travel, manufacturing, etc. With more inflation, the Fed will feel more confident raising rates.
The only thing left out of the equation is worker compensation. Once again, the middle class is going to take this one in the shorts.
Canada Joins the U.S. and Mexico in Trade Deal to Replace NAFTA… Our northern neighbor joined the agreement at the last minute, giving up a little ground on dairy products.
What it means – The new agreement, called the United States Mexico Canada (USMCA) Agreement, isn’t terribly different from NAFTA, and that’s a good thing. It implies that perhaps our president is willing to accept something less than an unconditional surrender from China and will lift the trade war cloud from the markets. We’ll see.
The biggest hurdle with China isn’t mercantilism, which essentially taxes its consumers, it’s technology theft. If Trump caves on that trade issue, he will have missed an opportunity to help American companies.
FDA Tells DEA to Remove CBD from Drug Schedule… In approving the new CBD (marijuana) based drug Epidiolex for treating epilepsy, the FDA notified the DEA that CBD should be removed from any classification under the Controlled Substances Act.
What it means – The DEA responded by classifying Epidiolex as a Schedule V drug, the lowest level, and leaving CBD under the highest level, Schedule I, which states that the compound has no known medical benefit, is highly addictive, and cannot be safely prescribed in any dosage. Essentially, the DEA told the FDA to go scratch. But this isn’t the end of the story.
Marijuana, particularly for medical use, has been moving very quickly from unloved to welcomed. As we find more uses for the two main compounds in the drug (THC and CBD), marijuana gains acceptance as a legitimate alternative to other drugs that are addictive and/or expensive.
One of the most interesting things about marijuana as medicine is that patients could grow their own cure. This probably scares the pants off pharmaceutical companies.
Elon Musk Agrees to Pay Fine and Relinquish Chairmanship… The Founder and CEO of Tesla (Nasdaq: TSLA) thought better of his hardline stance and agreed to pay a fine and step down as chairman after the SEC moved to prosecute him for fraud. Musk will neither admit nor deny guilt.
What it means – Once again, this proves that it’s not what you do, but who you are. Elon Musk committed fraud when he tweeted that he had secured funding to take Tesla private at $420. Anyone who relied on that – who bought shares or covered a short position – was economically harmed by his actions.
Fraud is straight forward. The SEC notes that it didn’t pursue the claim in part because Musk is so central to Tesla’s success. Come again? If you’re “essential” then you get a pass? That’s not blind justice, that’s playing favorites. Musk paying a $20 million fine is like us paying a $25 parking ticket. It’s annoying, and inconsequential.
Data supplied by Dent Research/Delray Beach Publishing
“When the facts change, I change my mind.
What do you do, sir?” ~ John Maynard Keynes
Our plan is “the plan will change.”
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