Stocks opened significantly higher this morning before turning sharply lower within the first 30 minutes of trading. The Dow, S&P, and Nasdaq Composite all fell, dragged down by better-than-expected economic data.
The 10-year Treasury yield receded slightly as well, dropping to 4.03% from Monday’s high of 4.07%.
The Bureau of Labor Statistics (BLS) reported this morning that job openings soared by 437,000 in September, rising to 10.72 million total employment vacancies vs. 9.85 million expected. Quits plummeted by 123,000 to 4.061 million, hitting the second lowest quit level since July 2021.
The openings number was a shocking beat by all accounts, and with a Fed rate hike coming tomorrow afternoon, it signaled to many investors that a pivot is now officially off the table.
“Hopes for a Fed dovish pivot are misplaced if today’s job openings are any guide,” explained Lazard Asset Management’s Ron Temple in a note.
“With nearly 1.9 open jobs for each unemployed person, labor market tightness remains a key challenge for controlling inflation.”
He concluded, adding:
“Markets may be underestimating where the Fed’s terminal rate is and should prepare for further financial tightening.”
Fed mouthpiece and Wall Street Journal writer Nick Timiraos – aka, “NickiLeaks” – also commented on the data in a tweet this morning:
“The number of job openings in September rose by 437,000 to 10.7 million (and the August figure was revised up by 200,000). The Fed would like to see the ratio of vacancies to unemployed workers decline, and it ticked up in September to 1.86 from 1.68.”
This is more or less Powell’s worst-case scenario. Forward guidance from America’s top stocks this earnings season has been very poor, but labor remains tight. There hasn’t really been a comparable situation (slumping earnings plus tight labor) in the Fed’s history.
That means the Fed may be forced to continue hiking aggressively into the teeth of a brutal economic slowdown. Powell has repeatedly said that he’s keeping a close eye on US labor. It doesn’t help that inflation has remained stubbornly high, either.
Until Powell sees something change in that regard, he won’t have much reason to abandon his hawkish stance unless something in the US financial structure “breaks.”
Simply put, today’s job opening data has made it much harder to be a bull heading into tomorrow’s post-FOMC press conference. Investors have been hoping for a year-end rally as the market’s seasonal tendency takes hold.
According to Citi’s Hanah Sheetz, however, the odds of a major year-end rally have fallen significantly due to October’s stretch of see-saw trading.
“No year-end rally in our view,” Sheetz wrote.
“Seasonals are much stronger when returns are positive through October — this year they are not. [A] rotation strategy is mildly profitable when applied across asset classes, but that it is unlikely to work this year given weak summer returns.”
Stocks have a shot to head higher through the holidays, but with a hawkish Fed, the gains will certainly be limited, Sheetz’s analysis aside.
All eyes are pointed to the post-FOMC presser as a result. Will Powell disappoint? Maybe, maybe not. But if he even hints at a 50 basis point hike in December (vs. 75 basis points), expect stocks to rally fiercely. Anything outside of that could see the market sink, potentially retracing much of last week’s gains.
