The US’ payroll figures rose more than expected, so US equities are down this morning, and long-duration bonds are getting hit with a major punch. The 10- and 30-yr UST yields were at their highest since 2007, at 4.83% and 4.98%, respectively, at the time of writing this note.
What drove the payroll punch? The net revision of 119k was in the state and local education numbers. The big jump in private sector jobs was due to services, up 234k (more than 2x the 106k ave of the prior 3 mo). Per Pantheon Macro:
So, what do you make of this report? The Fed will have a tough time navigating these waters, because even if inflation moderates, members will look at the strong jobs market and worry about spiking the football too soon. No one will ever forget their incorrect “transitory inflation” call. So they may just ask the public to take one more dose of medicine and raise rates in Nov, if they don’t get further data points that contradict today’s report. But you know they don’t want to, so if there is ANY data they can use to pause again, they will.
UBS points out that the forward multiple for the S&P still is near 18.0x. Typically, during the bottom of a recession, equities are flaunting a ratio <14x. If consumers and businesses can’t keep their chin up with positive expectations, then present valuations could be called expensive. So, keep watching for sentiment figures and Q&A during earnings season.
Investors brought $70.8bn into cash (who can blame them, with these money market yields). BofA’s Hartnett is making the call that 2024 will be the year for bonds, as higher rates pressure the US into a recession. Treasury funds posted their 34th week of inflows, per EPFR.
Spreads on corporate bonds widened, and we know companies’ leverage is at high levels after increased borrowing over the past couple of years. They borrowed more than $500B in net terms since the Fed started hiking and aren’t focused on paydown schedules yet, per Bloomberg. So, we imagine there’s some rejiggering of forecasts in financial departments this morning…focusing on current interest coverage ratios and cash flow needs. Bloomberg is out with a story about the impact of 5% yields on consumers’ pockets and company balance sheets.
Exxon Mobil is looking to acquire Pioneer Natural Resources, per Reuters. That’s a big deal—its largest since 1999.
Tesla cut its Model 3 and Model Y prices in the US, per CNBC. It needs to sell cars. The FT points out that high US interest rates + costly inventory = vehicles less affordable. In addition, Amazon lowered its threshold for free grocery delivery, per Bloomberg…but that is more of a strategic move probably, to fill up its delivery routes.
As you’ve seen, Walmart’s comments about Ozempic causing lower demand for certain food goods sent stocks of companies like ABI, Nestle, Unilever, and Danone down. Chocolate makers and fast food joints in swanky areas are in a world of hurt. But…maybe this is an opportunity? What do you think happens when people get off the drug after losing the weight and wanting to spend time outside of the bathroom again? I’ll bet there is a chocolate boom…
Old timers in the oil patch used to say that the “cure for high prices is high prices.” Recent crack spread data suggests that high gasoline prices have dented demand, suggesting that there may be some relief at the pump in sight…
