Commentary Directory

Cautiously Optimistic

Jacob Hess
October 11, 2021

The Week Behind

Three stories drove the conversation about the economy last week as the first full week of the new quarter signaled the start to the end of the year. Congress continued its squabble over the debt ceiling and spending. Energy prices soared in Europe and Asia as shortages threaten near-term activity. Finally, the week ended with a huge jobs report that could have implications for Fed tapering. Throughout it all, the equity and bond market were looking shaky after sell-offs in late September. It seems that the world is trying to maintain a cautiously optimistic outlook as uncertainty intensifies.

The threat of a US federal default will continue to loom until December now. This week, the Senate passed legislation to fund the government through early December after Senator McConnell backed off of a hardline stance to raise the debt limit temporarily. The bill raises the limit by $480 billion, the amount that the Treasury estimates it would need to fund through December. The resolution calmed the markets for short-term Treasury bills. The 1-month bill opened the week above 10 basis points and closed the week around 2 basis points.

In reality, nothing seems to be solved here except that there is more time to work towards a bipartisan agreement. Wells Fargo believes the bill "simply moves the problem from October to December." However, there still seems to be a general sense of denial that any catastrophic could come from this. Moody's Analytics insists that "it is unimaginable that lawmakers would allow the US to breach the debt ceiling." The $3.5 trillion Build Back Better bill is another issue that divides the two parties, and a resolution there could help diffuse debt limit disagreements. However, no one should get their hopes up.

From Wells Fargo

This summer has been all about supply chain disruptions, and what better way to start a new quarter than with an intensifying energy crisis. Fuel and power prices are rising as a result compounding previous issues with inflation. ING points out some supply factors to pay attention to including historically low levels of natural gas storage in Europe and Asia and supplier flows that are not increasing despite rising prices. Despite low storage levels, key OPEC suppliers to these regions are sticking with previously announced production increases in an announcement made on Oct 4th. Production for OPEC+ is set to be around 39.7 mil b/d with Russia included at 9.9 mil b/d. This will be a welcome 2.2 mil b/d hike over OPEC+ August production of 37.5 mil b/d (including Russia at 10.7 mil b/d).

The week was capped off with the last jobs report before the November FOMC meeting, and it did disappoint. The 194k jobs added in September was well below the 500k expected by a Bloomberg survey and the 720k expected by Dow Jones. The unemployment rate still saw a decent drop, down -0.4% to 4.8%, but remains -3.5% below its February 2020 level. Again, we saw another solid decline in permanent job losers, down -236k to 2.3 million, while temporary layoffs remained at 1.1 million for the 2nd straight month. The strongest job gains were in the professional and business services sector (+60k) and the leisure and hospitality sector (+74k), the sectors which also have the highest rates of job openings at 8.1% and 10.7%.

It's encouraging to see continued progress in these areas, and the Fed will undoubtedly use the fact the weakest sectors are still leading job gains as a point in the corner of "progress towards full employment." However, because gains are coming in those industries that are desperate for workers, wage growth has accelerated substantially to 4.6% YoY (the 3rd straight month above 4.0%). Cue further inflationary pressure, but not inflationary pressure that the Fed is likely to pay attention to. Instead, the FOMC committee might see that as a headwind for consumption growth in Q4. Overall, the report is probably not likely to have a major impact on the Fed's tapering decision. The hawkish tilt in the September meeting gives the impression that observing the September jobs report was just a formality.

Chart of the Week

From FRED and Federal Reserve

The unemployment rate dropped -0.4% to 4.8% in September, reaching the Fed's forecast for end of year unemployment a whole quarter early. Does this satisfy the central bank's requirements for tapering?

The Week Ahead

Key reports this week come in the middle of the week: JOLTS on Tuesday, CPI on Wednesday, PPI on Thursday. These updates will provide further guidance on the US economic situation for the Fed. German CPI also comes out on Wednesday and will give a helpful look into inflation in Europe. Further developments in the energy markets will be key as well. Early monday Morning, Brent crude oil traded up 2.6% to just above $84.