Perspective: Morning Commentary for October 4

October 4 – Fresh jobs data and a temporary end to the port workers strike drove sentiment this morning, on top of the ongoing escalating tensions in the Middle East as we head into a weekend when the headlines will continue to emerge. The VIX continues to trade near 19 this morning, while the dollar index is trading at a seven-week high near 102.6. Yields on 10-year Treasuries are trading near 3.95%, after hitting fresh eight-week high, while yields on 2-year Treasuries are trading near 3.86%. Crude oil prices continue to push higher, while the grain and oilseed markets were mixed to lower overnight.

The U.S. economy created 254K jobs in September, which nearly doubled analyst expectations of 132.5K jobs. Furthermore, the previous two months numbers were revised upward by a combined 72K, with July boosted by 55K and the August number raised by 17K jobs created. The unemployment rate ticked lower to 4.1% in September, down from analyst expectations that it would remain unchanged at 4.2%. Private payrolls grew by 223K in September, up from analyst expectations of 125K, and exceeding the 114K private sector jobs created in August. Manufacturing lost 7K jobs in September, after losing 27K in August, while food services and drinking establishments added 69K, which is well above the 12-month average of 14K. Healthcare added 45K jobs in September, while government added 31K and construction added 25K jobs. The job participation rate remained unchanged at 62.7% of the workforce.

Wage inflation hasn’t totally gone away either. The average hourly earnings rate rose 0.4% month-on-month in September, matching the previous month’s pace, but exceeding expectations that it would slow to 0.3%. Average hourly earnings were up 4.0% year-on-year in September, up from 3.8% in August, and exceeding analyst expectations that it would slip lower to 3.7%. Yet, the average hourly workweek slipped to 34.2 hours, down from expectations that it would remain unchanged at 34.3 hours.

The average hourly earnings data will no doubt reflect higher earnings for port workers in future reports after the International Longshoremen’s Association and the United States Maritime Alliance agreed to a tentative deal on wages late on Thursday. The agreement is a short one – lasting until January 15^th, or just 5 days prior to inauguration day for whoever wins the presidential election in November. The deal does not address the highly contentious issue of automation at the ports, but it does give a hefty 61.5% pay raise to workers over the next six years, according to sources close to the talks. The short-term contract ends the strike that created congestion at U.S. ports on the East and Gulf Coasts.

The Federal Reserve told us at Jackson Hole that inflation was no longer their focus, but rather they were committed to a monetary policy that would not allow the unemployment rate to rise above the then 4.3% level. As such, they rang a dovish bell that led the market to start pricing in very aggressive rate cuts over the next 9 months to a year. Fed members then proceeded to slash 50 basis points off its benchmark rate on September 18^th, adding more fuel to the dovish fires burning on Wall Street. Realizing that perhaps they had over-stoked those dovish fires, inviting an expansion that could re-ignite inflation again, Powell spoke with a more hawkish tone at the beginning of this week, suggesting that 25-basis point cuts at future meetings would be the norm going forward, depending on the data. But the proverbial “cat is out of the bag.” Today’s market is trying to quickly right the ship. Fed fund futures dialed back expectations of 75 basis points of cuts by year end, and its expectations for actual rates at the June meeting are now roughly 50 basis points higher than they were trading a short time back. Treasury yields jumped 10 basis points in roughly the first minute following this morning’s data release.

Fund managers ramped up the pace at which they were unwinding short positions in many commodities after the Fed’s September 50-basis point rate cut, with the 5-Year Breakeven Inflation Rate turning higher, reflecting fears that re-inflation may be around the corner. This morning’s data adds to those concerns, although the funds have largely reached their target of unwinding short positions. The question was, would they have incentive to build long positions. The answer for that question in energy is likely tied to how the Middle East war unfolds. For the grain and oilseeds, we’ll likely need to see improving fundamentals. That may be easiest for wheat, and hardest for soybeans in the months ahead, although soybeans, corn and wheat are all adequately supplied in the near-term. Rains continue to move forward in Brazil’s Center-West region forecast, supporting soybean planting there. The U.S. Plains and the Black Sea winter wheat belts remain dry, with the big U.S. corn and soybean harvests rapidly advancing, pushing bushels onto the market due to tight storage issues.