Stocks Chug Ahead
Stocks climbed last week amid generally positive earnings results and, perversely, a weaker than expected jobs report. Many market participants anticipated the weaker labor data would urge the Federal Reserve to maintain its current asset-purchasing program. For the week, the S&P 500 gained 0.9% while the Dow Jones Industrial Average added 1.1%. The yield on the 10-year Treasury fell 7 bps to 2.53%.
Economic data was mixed last week, as some long delayed reports began hitting the newswires. This includes measures concerning employment, housing, and manufacturing.
On the housing front, a couple of key indicators suggested that this sector continues to slow. Existing home sales in September were reported in line with expectations, at a seasonally adjusted annual rate of 5.29 million homes. This was 1.9% below August’s reading, although that month was the highest sales level reported in four years. Tight supply is keeping the median home sales price elevated, as that measure increased 11.7% year-over-year. A reduced level of distressed transactions, now at 14%, is also contributing to that rise.
There is concern, however, that October’s report could be much less pleasant. NAR President Gary Thomas noted, “Just one impact of the recent government shutdown – delays in tax transcripts needed for approval of mortgage loans – put a monkey wrench in the transaction process and could negatively impact sales closings in next month’s report.”
More price data was released in the form of the FHFA Home Price Index. Although August was the 19th straight monthly increase in home prices, the level of increases has noticeably tapered since the start of the year. Prices rose 0.3% during the month, down from 0.8% the month prior. The impact of higher mortgage rates is filtering through to this market.
Durable goods were disappointing in September, despite a headline figure that indicated 3.7% growth. This was entirely due to the transportation sector, specifically non-defense, which advanced 58%. The core measure, which strips out the volatile transportation component, reported a much less enticing 0.1% decline in the month. That was well below expectations, and follows last month’s negative 0.4% reading. Despite more positive information being relayed in the ISM report, new orders and the regional Fed manufacturing surveys indicate a sector that is slowing.
The impact of October’s government shutdown and debt ceiling battle filtered through to consumer sentiment. Reuter’s/University of Michigan reported that its headline index sank to 73.2 from 77.5 the prior month, a ten-month low. Notably, the expectations component of this indicator fell to a two-year low, as consumers are undoubtedly concerned about a repeat of October’s Washington standoff in January/February.
Jobs, Jobs, Jobs
Following an extended delay, investors were disappointed (sort of) to learn that the September payroll report was another dud. The headline figure was below expectations, but investors were largely comforted by knowing this likely extended QE3 further into the future.
As a recap, nonfarm payrolls increased 148,000 in September and the unemployment rate declined slightly to 7.2%. Gains came from professional and business services, retail trade and health care. Sectors that shed jobs include leisure & hospitality, and financial services.
Source: Federal Reserve Bank of St. Louis
Despite adding 148,000 jobs in September, economists were anticipating a print of 184,000. It marked another round of underwhelming growth, and one that points to ongoing issues within the labor markets.
The labor force participation rate was unchanged in September, but that is a minor deviation from a broader trend. Over the year, that measure has fallen 0.4%, and contributed to the decline in the unemployment rate.
Confirming this trend, the employment-to-population ratio remained at 58.6% in September, near generational lows.
Source: Center on Budget and Policy Priorities
This is problematic for any number of reasons, and the Hamilton Project demonstrates the longer-term structural headaches presented by such meager job growth. The “jobs gap,” a measurement of the number of jobs needed to return labor markets to pre-recession levels, indicates that average job growth of 208,000 per month would return the economy to pre-recession status by 2019.
Source: The Hamilton Project
Also challenging for the labor markets is the number of people for each job opening. According to the Job Openings and Labor Turnover Survey, there were roughly three unemployed individuals for every job opening. This improved from the peak of the crisis, but still well above prior-recession periods.
Source: Bureau of Labor Statistics
The September labor report confirmed what many economists were worried about – labor markets remaining soft. Underlying weakness reduces the likelihood that Federal Reserve officials step back from their asset purchases, potentially delaying tapering until well into 2014.
The Week Ahead
There are a number of economic reports for investors to digest this week, including industrial production, retail sales, inflation, the Case-Shiller, and the ISM manufacturing index.
Looming over this and ongoing corporate results is the FOMC meeting scheduled for Tuesday and Wednesday. Speculation over whether the Fed will reduce its current pace of asset purchases will surely dominate headlines over the next few days.
Other central banks meeting this week include the Bank of Japan, Hungary, India, Israel, New Zealand, and Egypt.
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