A Focus on Labor Market Reports and Fed Speakers

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It's September 30. We're heading into the next quarter, but there's an awful lot for the market to digest this week. But first of all, I want to point out something about last week. We saw the VIX climb higher. I wouldn't say it was dramatic, but it was inching higher. And we want to keep our eye on that this week because when we look for reasons that the VIX climbed higher, despite the fact that the equity market actually closed in September, surprisingly in positive territory, because September has such a bad reputation. But we pay attention to what could be bothering traders and investors, but mainly traders to actually push that volatility index a bit higher. And we look at the headlines that are suggesting more and more increasingly that perhaps we will not have a clear understanding of the composition of the government on the evening of the election.

Quincy Krosby:

That we perhaps have to go perhaps two days, three days, four days. I mean, even seen some that said we may have to wait a week before we know who is going to go into the White House, who's won the Senate, who won the the House of Representatives. This is going to be important if this view continues. Remember, markets want certainty that's above all else. They want certainty. And if that certainty is hammered as we get closer to the election, this is going to be an issue perhaps for the market. So let's keep our eye on the volatility index. The other thing I do want to point out is that we are going to be heading into the earning season and it's going to be very important. We will start on the 11, Friday the 11, with the banks. It'll start with JP Morgan, as you know.

Quincy Krosby:

But this is going to be extremely important as an indicator of whether or not the economy is slowing. This is another debate in the market as to whether or not the economy is slowing, despite the fact that we have had some solid numbers in terms of the GDP forecast. So all of this is in question and a market that is increasingly concerned about whether or not looking ahead the economy is slowing, and particularly about the consumer, particularly about the labor market. So going into this week's labor market report, we will have the ADP employment report on Wednesday, October 2, and last month, we saw the number coming down in terms of the private sector employment. We'll see whether or not it comes in below a hundred thousand. That's going to be important. And also what kinds of jobs are being created.

Quincy Krosby:

For the Friday Employment report, and this is extremely important, is what is the headline number? Remember we were 142,000 new jobs created last month. Expectations now and consensus estimates is 144,000 new jobs. But overall, we're going to be looking at a couple of things. Where is the unemployment rate? Expectations are that we remain at 4.2%. I will say though, that if it climbs higher, ticking higher, 4.3%, there will be concern in the market. There is no doubt about it. Also, in terms of wages, wages inched a little bit higher last month, which actually was helpful for workers. It didn't climb dramatically higher. You don't want to see that at this point because that could, that could put pressure on on companies. But the expectations are that we will see wages come down just a tad. Also, I do want to report that last month and we talked about it and right after that announcement, in the Talking Point, we saw the number of hours worked increased in the last report.

Quincy Krosby:

This is very important. We want to make sure that hours worked - that's what we look at, hours worked - remain steady because if they start declining, it is simply a reflection of the economy, the underlying, the broader economy. So all of this is going to be important and this comes out on Friday. Also, this week we are paying attention to the Institute for Supply Management, ISM, manufacturing report and also the ISM service sector report. The ISM numbers, as I say, every single month when we're going to see them are extremely important because they really do have an underpinning that reflects where the S&P 500 is heading. What we are expecting is this, that for the service sector that perhaps it stays in positive territory because what is positive territory? Anything above 50. Anything below 50 shows we are seeing contraction. And since the service sector is largest component of the economy, we want to see it staying at 51.5% or higher.

Quincy Krosby:

That would be even better, suggesting that the service sector is stronger than initially estimated or forecast. Now for the manufacturing report, which is coming out on tomorrow, on Tuesday, the expectations are, it remains at the same level as last month, at 47.2. The manufacturing reports are coming in and there are questions in terms of employment, in manufacturing. Questions regarding the prices paid. And I want to stress this because we have, in essence, declared victory on prices on inflation. Now, if those prices paid component climbs higher, that is to say that in the manufacturing sector they have to pay more for all of the input costs and therefore they're going to try to up the prices that they're going to charge. That's going to give an issue a warning about the potential for inflation to increase. Similarly, in the service sector, the same exact thing. We will be paying very close attention to the prices paid.

Quincy Krosby:

It's a sub component. And also the prices received, and also what they intend to do in terms of higher prices of what they're going to charge. All of this is going to create a picture, a snapshot, of potential inflation and the market's going to pay very close attention to it. So we march towards also the construction reports that are going to be coming out. Construction spending expectations are, by the way, this comes out tomorrow Tuesday, that it will inch higher following a negative report that we had the last month. And last but not least, is job openings. Now I want to point this out. The Jolts report, Job Opening and Labor Turnover, it has a dicey, dicey reputation. That the survey is not really indicative of how many job openings there are. But nonetheless, the market is always talking about it. They look at it. The expectations are that for job openings, it may stay the same around 7.5, 7.7 million job openings.

Quincy Krosby:

And, you know, if the job openings come down, the market will look at it and say, you see, we're seeing a shrinkage in the job openings. But please keep in mind that it does have a dicey reputation. We do like to look at the quit rate. How many people are quitting their jobs? Normally, people quit their jobs to go get another job that pays more. If that quit rate, however is lower than expectations, the market's going to have a view of that and that's going to be, see not enough job openings. People are nervous. They're going to stay where they are afraid to leave. And simply, if there aren't enough job openings, there aren't that many places to jump to. So all of this is going to be important for the market, but there is a heavy, heavy calendar of Federal Reserve speakers including today.

Quincy Krosby:

And the expectations are that the most important one is when we hear from Federal Reserve Chair Powell. He's expected to speak this week on a panel and we'll see what he has to say. It's going to be quite important. He's going to speak today, apparently just about two o'clock Eastern time. Why is it so important? We want to see if he sheds any light on how he sees the economy faring. All of this, all of the data this week, by the way, will actually pass through to expectations for the November, yes, the November meeting in which the Fed can raise rates or cut rates. The expectations are obviously that they are going to cut rates, but the question is, is there going to be another 50 basis points or will it be 25 basis points? So all of the data this week, particularly about the labor landscape, will be factored in to what the market thinks is going to happen.

Quincy Krosby:

Also, I do want to point out that we're going to be heading towards the earning season. We will start on Friday, October 11. And what we're going to be looking for when we start getting closer to the earning season is whether or not the banks, particularly the credit cards that they have, what that tells us about the U.S. consumer. But that will be not until we get to the actual earning season. The expectations, by the way, just as an FYI, are that earnings are going to hold up, and that we will get through this earning season, and it will actually be productive for the market. But one other aspect as we get closer to it, is that we are going to be reaching a period in which the share buybacks slow. Remember share buybacks and share buyback announcements are extremely important for the market. And we won't go into why.

Quincy Krosby:

But when you start to see that slowdown and that it tends to take away a catalyst for announcements of share buybacks. So we will be paying attention to that. Overall, the market is increasingly focused on the election, but what we're seeing is because it seems so close, we don't see one sector versus another. So just to give you an example, very much a close associated with the Republicans is the financial markets because it looks as if they would be less prone to heavy, heavy regulation. So we haven't seen that is playing out. Similarly, on the Democratic side is very closely associated with green energy, solar energy, and so on. We haven't seen that play out. And the reason is the market is looking at the election and it's still very, very close. Most likely as we move into next week and the week after, we'll start to see some delineation and we'll start to see those buckets that are associated with the Republicans and buckets associated with the Democrats begin to indicate at least what the market expects because that's what we're focused on, always about what the market is looking at.

Quincy Krosby:

So a very important week this week. Make no mistake about it. We are focused on Friday's payroll report. It is going to be extremely important. We're looking to see are there any more downward revisions? We're looking to see how many new jobs are created, and in which sectors are they being created, and we're also looking to pay very close attention to the unemployment rate to see if it inches higher or does it stay the same or even inches lower than 4.2%. And also, the number of hours worked. So important to give us a perspective on the underlying economy because certainly you don't add hours to workers weeks if you don't need them. That is something that you're not going to see happen, especially when operating margins are so important for companies. So take good care. We'll be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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