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Tepid Jobs Data Could Add New Variable To Fed Policy Equation

Published 09/03/2021, 10:55 AM

That hissing noise you hear is the air being let out of the market’s tires after an epically disappointing August jobs report. The Delta variant seems to be sinking its teeth into the economy, taking a massive bite into the jobs picture.

Job gains of 235,000 in August reported today by the U.S. government were more than 500,000 below the average analyst estimate for 750,000, and raise new questions about the pace of economic growth as the country continues to struggle with COVID. Lack of any gains for the leisure and hospitality sector played a big role in the disappointing data.

On the plus side, the Labor Department did raise its estimates for jobs growth in June and July, to 962,000 and 1.1 million, respectively. You can’t necessarily discount the possibility that we could see an upward revision for August next month but, given the impact leisure and hospitality had on today’s report (see more below), subsequent reports could hinge on the Delta variant.

Major indices held pretty steady after the report—arguably quite a feat given the recent string of record highs. Perhaps it’s one of those times when bad news doesn’t have much of an impact on stock prices, as a report like this could ease fears of any near-term Fed move to pull back on stimulus. Remember, just a week ago Fed Chairman Jerome Powell suggested the Fed could begin tapering its bond-buying program, but added that employment hadn’t met the central bank’s goals. This report doesn’t really go very far to meeting the Fed’s goal of getting employment back to where it was before COVID.

A Peek Under The Hood Of Today’s Report

Having said all that, remember, this is just one month of data. One month or one report is never a trend. Jobs growth is averaging a healthy 766,000 a month since June, even with today’s disappointing number factored in.

Also, a lot of this miss appeared to be centered in the leisure and hospitality space, where employment was unchanged after averaging gains of 350,000 per month over the previous six months. That’s probably the biggest reason for the huge miss in expectations by Wall Street, and likely reflects Delta variant concerns affecting restaurants and hotels. Assuming the country gets a handle on this variant in coming months, it’s possible jobs growth in this category could rebound pretty quickly, as it often has following disturbances.

It was good to see 37,000 jobs added in manufacturing and 53,000 jobs added in transportation and warehousing during August. Those are categories you like to see going up because they can speak to decent underlying growth in economic demand by businesses and consumers. Also, average hourly earnings rose 0.6%, which was above the 0.3% estimate and might have partly reflected lack of growth in the low-paying leisure and hospitality sector. This isn’t a number that’s likely to have the Fed worried about wage inflation, but it does mean more money going into peoples’ pockets—never a bad thing.

Also, you can’t overlook that the overall unemployment rate fell to 5.2% from 5.4% the previous month. That’s the lowest since COVID began. Sometimes, drops in the unemployment rate can reflect discouraged workers leaving the labor force and no longer being counted as unemployed, but that wasn’t the case in August. Among those not in the labor force who wanted a job, or, as the Labor Department defines it, “the number of persons marginally attached to the labor force,” decreased by 295,000 over the month.

Before the jobs report today, the market seemed tied up in a dull, pre-holiday type of trading over the last few sessions. Outside of the data, we don’t really have anything that you can hang your hat on and say this is where we’re going, or that this is the sector that I need to be involved in. Once the buzz over the jobs data cools down a bit today, it’s likely we could continue to see this back-and-forth type of trade into the weekend.

Long Weekend Ahead, Followed by Uneventful Weekly Calendar

Typically, a long holiday weekend can mean thin trading leading into Friday afternoon as some market participants look to get an early start on any festivities. Volume might be lower than normal later today, so anyone stepping in to trade might want to consider keeping trade sizes lower than normal in case of sudden swings. This is the time of year when people tend to get disengaged. While not everyone is gone, many families are getting the kids back to school or wrapping up late-summer vacations.

Even Tuesday might see lower than normal volume due to a religious observance. Things might not be back to full speed until next Wednesday from a volume standpoint, and when volume is thin, trading sometimes gets more treacherous. It’s just something to keep in mind over the coming days.

Once we’re all back next week, there’s really not much in the way of data till next Friday when the government is scheduled to release the August Producer Price Index (PPI). Inflation has been such a heavy focus lately, so this report is bound to get some attention. Interestingly, the PPI usually comes out a day before or after the Consumer Price Index (CPI), but this time there’s more separation. We won’t see CPI until the week of Sept. 13.

Earnings-wise, next week doesn’t look too crowded, either. There’s Oracle (NYSE:ORCL) and Kroger (NYSE:KR), but otherwise not a lot of big gorillas that can really move a market. Instead, investors may be watching for news out of Washington, D.C., on any moves in the budget or infrastructure bills. The debt ceiling is another issue that’s been put off, but Congress and the administration can’t kick that ball down the road forever.

'Green Machine' A Good Name For Thursday’s Session

Yesterday saw strength across the board in all the major indices as investors seemed to get some cheer out of a positive report from the government on initial jobless claims. Eight of the 11 S&P 500 sectors finished in the green, led by energy as crude prices rolled up gains. Crude is now back toward the upper end of its recent range, hitting $70 a barrel yesterday. There’s been firm resistance up near $75 that’s lasted literally for years, however. Several tests of that earlier this year came to nothing.

The simple takeaway from higher crude prices is that people might be getting more optimistic about economic growth. Sentiment around that has been back and forth all week, with so-called “reopening” stocks down one day and up the next. Yesterday was an “up” day, with shares of small-caps gaining ground and Energy stocks also showing some muscle. Those same energy stocks we saw leading the charge on other “reopening days” lately like Occidental (NYSE:OXY) and Halliburton (NYSE:HAL) showed up on the leaderboard again Thursday.

Interestingly, the technology sector was one of the only ones to lose ground yesterday as shares of Microsoft (NASDAQ:MSFT), ORCL and Broadcom (NASDAQ:AVGO) all fell. A few more days like this and you’ll probably hear pundits saying that it looks like earlier this year when the so-called “cyclicals” such as financials and energy outpaced Tech for months amid hopes for economic recovery.

Still, if you check sector performance over the last month, it’s really not telling that story. Or any particular story at all. Basically everything is green since a month ago except Energy, and Energy has roared back over the last week or two (see chart). Caution hasn’t completely left the building, however. The 10-year Treasury yield slipped under 1.3% yesterday and the Cboe Volatility Index (VIX) crept up a bit.

Yesterday we mentioned how “stay at home” stocks like Peloton (NASDAQ:PTON), Zoom (NASDAQ:ZM) and Chewy (NYSE:CHWY) all got pounded after recent earnings. Both PTON and ZM found some buyers on the dip Thursday, so it will be interesting to see if the same happens for CHWY in coming days.

There still seems to be a lot of investor interest in the big stay-at-home names, though none are matching last year’s incredible performance. Consider keeping an eye on where these stocks go over the next few weeks as more people head back to work (barring another surge in cases of the Delta variant, of course).

Anyway, speaking of Broadcom, shares inched up a bit in the overnight session after the company’s earnings looked solid. DocuSign (NASDAQ:DOCU) also beat analysts’ consensus earnings views and saw shares get a boost overnight.

IXE And IXT Combined Daily Chart.

CHART OF THE DAY: CHARGING UP. After a dim summer, the Energy sector (IXE—candlestick) has brightened a bit over the past week or two amid hope for stronger economic growth that’s raised crude prices. However, the Tech sector (IXT—purple line) which sometimes has traded the opposite of Energy this year, continues to fly high as well over the three months monitored by the chart. Data Source: S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

U.S. Crude Looking Up: Looking back at the OPEC decision this week, another interesting thing was how the organization cited rising U.S. production as a reason not to produce more crude. There may be something to that. The U.S. oil rig count rose another five rigs last week to 410, according to Baker Hughes (BKR), up from 180 a year ago. That’s pretty quick growth, and could mean more U.S. crude starting to hit the market. We’ll get an update on the rig count today.

Domestic production reached a four-week average of 11.4 million barrels a day in the most recent week, according to the Energy Information Administration in data released Wednesday. That’s up sharply from about 10.4 million a year ago. Production hit an all-time peak near 13 million barrels a day right before COVID, so there’s potentially more barrels that could be produced if today’s prices are enough to provide some incentive.

Gold Takes a Hit, Keeps Fighting: Gold’s price action might remind some people of a quote from a certain fictional 1970s movie boxer, who said, “It’s about how hard you can get hit and keep moving forward.” That quote is a testament to inner strength, and lately it appears gold has had a lot more fight despite some recent smackdowns.

Gold hasn’t been able to successfully break above the four-week resistance at $1837.50, but the yellow metal refuses to sink below the 2021 lows of $1675.00, having bounced back from that level three times, the last test on August 9 showing aggressive refusal and resilience. Fed Chairman Jerome Powell recently said that tapering of the central bank’s $120 billion purchases will likely take place this year. But he didn’t specify when or how much. Is the gold market getting a sense that this “hawkish” message might be actualized in a more “dovish” and non-aggressive manner? To get a better read on the market’s sentiment, watch what the price of gold does as it approaches $1837.50.

COVID Counters: The seven-day average of new COVID cases in the U.S. has surged 88% from July 1 to Sept. 1. Starting with 19,722 cases on a weekly average, that figure bumped up to 166,080 according to The New York Times. Of course, we wouldn’t know any of this if it weren’t for COVID testing. Perhaps it wouldn’t be much of a surprise to see that around this same period, shares of U.S. lab Quest Diagnostics (NYSE:DGX) also rose around 18%, while shares of Laboratory Corporation (NYSE:LH) rose 17%, although between the two, the latter is the year’s clear leader in market performance by a wide margin.

According to the Centers for Disease Control and Prevention (CDC), the Delta variant accounts for around 93% of all COVID cases across the globe. And according to the COVID-19 Scenario Modelling Hub, we’re looking at a potential October peak, though a doctor at John Hopkins Center for Health Security warns that cases are often underestimated and unclear. We don’t know what Delta has in store for us in the near future. But you can be more or less certain that until we get a lid on this new variant, or any other variant that may emerge, for that matter, more COVID testing is likely to continue.

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