Hiring in an Age of Uncertainty

Economic

Summary:

There were a few data signals going into last Friday’s blockbuster jobs report that many market watchers and economists missed.

Layoffs, as measured by a rolling four-week average of initial jobless claims, hit their lowest level in more than a year and a half. August showed an uptick in job openings, a hint that companies were about to ramp up hiring. And September’s ADP National Employment Report suggested that a rebound in private-sector hiring was under way.

Even people who read these data signals, however, might have been unprepared for the big jump in hiring we saw in Friday’s non-farm payrolls report from the Bureau of Labor Statistics. Job creation was up 60 percent, to 254,000 new jobs in September from 159,000 in August.

Even after applying upward revisions to August and July, average job gains for the three months preceding September were only 140,000.

What happened? Why were employers slow to hire this summer but so willing to hire in September?

The answer is uncertainty.

Uncertainty versus risk

Economists make a sharp distinction between risk and uncertainty. For employers, both can describe an unknown.

Companies can gauge risk by assigning a probability that the situation in question occurs. Then they can prepare for that outcome.

Uncertainty, by contrast, can’t be measured, and companies therefore can’t prepare for it. Uncertainty can lead employers to delay hiring and investment decisions.

Uncertainty is heightened

In May 2023, the World Health Organization declared an end to the public health emergency caused by the global pandemic, effectively ending one of the most uncertain episodes in economic history. More than a year later, however, we’re still living with higher-than-normal uncertainty.

The United States is nearing the end of a four-year presidential election cycle, which tends to create economic inertia as some companies and consumers put off making big financial decisions while they wait to see if big policy changes are in the making.

Monetary policy and inflation create their own uncertainty. In September, the Federal Reserve cut interest rates from their highest level in two decades. Before that decision, economic commentators were in wild disagreement about the health of the economy as they debated the likelihood of a soft or hard economic landing and argued over the Fed’s ability to navigate too-high inflation while avoiding an economic slowdown.

Global tensions in the Middle East are another source of uncertainty, with the added potential side effect of oil price volatility on another bout of inflation.

Last week’s short-lived port strike could have restarted another inflation surge had it continued. The labor action reminded us how supply chain logjams can arise suddenly.

Finally, Hurricane Helene is proving to be one of the most destructive U.S. storms on record, as measured both the number of lives lost and the cost to the economy.

Taken together, these events show how vulnerable the economy is to an increased level of uncertainty, be it geopolitical, social, monetary, political, or weather-related.

The effect on hiring

This summer, we saw the impact of uncertainty on hiring, particularly for companies with more than 500 workers. ADP payroll data showed that monthly hiring by large employers averaged a moderate 53,000 from June to August. In September, hiring by these large companies jumped to 86,000.

Part of that increase may be attributable to the long-awaited start of Fed rate cuts. There also was clearer evidence than we’ve seen in months, maybe years, that the Fed had engineered a soft landing that will put us on a path to low inflation with little or no economic pain.

My take

Seventy-five percent of the jobs created last month were in sectors that are less sensitive to interest rate policy, including government, leisure and hospitality, and education and healthcare.

Cyclical sectors, where rates make a big difference, either continued to shed jobs (manufacturing) or held steady (construction).

That means last month’s hiring surge wasn’t directly attributable to lower interest rates or changing economic conditions. Instead, it was triggered by a reduction in the uncertainty that has been clouding employer decisions. Hesitancy to hire over the summer wasn’t driven by economic weaknesses or lack of demand for workers.

There’s a lesson here for the Federal Reserve: Clarity is the antidote to uncertainty. It’s okay to be data-dependent, but if investors, companies, and consumers are kept guessing on monetary policy, that uncertainty could lead to unwarranted economic stasis that looks like economic weakness even if it isn’t.

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S&P Global Inc.

Economic

The worldwide PMI surveys showed average prices charged for goods and services rising globally at an increased rate in September. However, the pace remained among the weakest seen over the past four years to suggest that global consumer price inflation remains subdued by recent standards. Regional variances were noteworthy, however. While central bank targets have come into view via the PMI data in the US as well as the UK and eurozone, the former saw an uptick in price growth to serve as a reminder that risks persist in achieving sustainably low inflation.

Global PMI selling price inflation holds close to four-year low

The latest global PM average prices charged index, at 52.5, was above 52.3 recorded in August. However, August's reading had been the lowest since October 2020, and September's reading was the second-lowest seen over this near-four-year period.

Global inflation was meanwhile estimated at 4.0% in August according to S&P Global Market Intelligence calculations from the latest available national sources, its lowest since September 2021 and following the cooling trend that had been signalled in advance by the PMI. The PMI data - which tend to lead official inflation data by around six months - hint at the rate of increase will moderate closer to 3% in the coming months.

Increased service sector inflation - which has been the main cause of elevated inflation since late-2022 - was the cause of the higher rate of overall selling price inflation in September, though the rise needs to be considered in the context of August's reading having been the lowest since December 2020. Thus, while the rate of services inflation remains above its per-pandemic decade average, it is subdued by recent standards.

Manufacturing selling price inflation meanwhile ticked lower and has now fallen back in line with the pre-pandemic average.

US inflation shifts higher but remains subdued

Among the major economies, the US notably reported an increased rate of selling price inflation to the highest since March, driven by increased rates for both goods and services. However, historical comparisons with official rates of inflation, such as core PCE prices, suggest that even the current higher level of the PMI Prices Charged Index is consistent with US inflation remaining close to the FOMC's 2% target, both when compared to annual rates of change and annualised monthly changes in core PCE inflation.

As such, the PMI data support the Fed's shift in focus away from inflation to supporting the labour market, though none the less serves as a reminder that inflation still needs to be watched for a potential uptick.

UK PMI inflation signal closes in on 2%

In the UK, selling price inflation dropped in September to its lowest since February 2021. The further decline brings the PMI prices charged index closer - though still slightly above - the Bank of England's 2% target when compared with official core inflation. Although manufacturing price inflation nudged higher, often linked to supply shortages, services inflation - which has been the main area of elevated inflation in recent months - cooled to a 43-month low in an encouraging sign for the door to be opened for further Bank of England interest rate cuts.

Eurozone prices

The PMI selling price data meanwhile showed falling inflationary pressures in the eurozone, the index covering charges levied for goods and services dropping to its lowest since February 2021 and down to a level consistent with consumer price inflation falling below the ECB's target. Prices charged for goods fell at the fastest rate for four months and prices levied for services rose at the slowest rate since April 2021.

Prices fall in mainland China

Elsewhere, the PMI data showed inflationary pressures persisting to a modest but - by historical standards - relatively elevated rate in Japan, while prices fell in mainland China. The latter reflected falls in prices charged for both goods and services, the former dropping at the sharpest rate for six months.

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Warren Takunda

Economic

Japan's inflation-adjusted wages fell in August while household spending also declined, but analysts say underlying trends point to a gradual recovery in pay and consumption and should support the central bank's plans for additional rate hikes.

Real wages in the world's fourth-largest economy fell 0.6% in August from the same month a year earlier, according to date released by the Ministry of Health, Labour and Welfare on Tuesday. That came after a revised 0.3% rise in July.

Real wages had turned up in June for the first time in more than two years as companies bumped up summertime bonuses, though the labour ministry had said the contribution of such special payments to the data would wane from August.

Those payments rose 2.7% in August versus a revised 6.6% in July and 7.8% in June.

At the same time, the August wage data showed base salary marked the biggest rise in nearly 32 years at 3.0%, reflecting this spring's labour-management pay negotiations that led firms to deliver the biggest hike in three decades.

"The real wages falling back to a negative territory was expected," said Masato Koike, senior economist at Sompo Institute Plus. "In terms of the data itself, it's not that bad."

Separate data showed household spending declining 1.9% from the year-earlier in August, potentially raising doubts about the strength of private consumption, which accounts for more than half of Japan's economy.

The fall, however, was smaller than the market estimate for a 2.6% drop based on a Reuters poll, and on a seasonally adjusted basis, spending rose 2.0% from the previous month, marking the fastest pace of increase in a year.

"Although the household savings rate remains high, consumption will probably recover gradually if the perception of wage increases improves consumer sentiment," said Yutaro Suzuki, economist at Daiwa Securities.

Sustained wage growth is a prerequisite for the Bank of Japan to raise interest rates again after its first hike in 17 years in March and a follow-up increase in July.

While the central bank said in its quarterly report on Monday that a rise in prices and wages was spreading across Japan, it also noted the concern of small and medium-sized enterprises regarding attendant pressure on profit.

Nominal wages, or the average total cash earnings per worker per month, grew 3.0% to 296,588 yen ($1,999.11) versus August last year, compared with an on-year 3.4% rise in July. Overtime pay, a barometer of corporate strength, grew 2.6%.

The consumer price index officials used to calculate real wages, which includes fresh food prices but excludes owners' equivalent rent, climbed 3.5% in August, the highest rise since October last year.

Japan's economy expanded by an annualised 2.9% rate on solid consumption and core inflation remains above the central bank's 2% target, keeping alive expectations for further rate hikes.

($1 = 148.3600 yen)

Source: Reuters

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API

Energy

American Petroleum Institute (API) President and CEO Mike Sommers addressed the New Mexico Oil and Gas Association to discuss how the next administration faces important decisions to secure America's energy advantage at a time of rising geopolitical volatility around the world. Sommers referenced new polling conducted by Morning Consult that found nine in 10 voters in key battleground states are looking for details from the presidential candidates on energy issues. Four in five voters support leveraging America's domestic resources rather than relying on other regions of the world.

“We look around the world today, and ongoing conflicts remind us that secure, reliable access to energy is at the core of our nation's security – as well as the security of America's allies,” Sommers said. “But our energy security should never be taken for granted, and we need policies that ensure we can meet our energy needs tomorrow, not just today."

With escalating tensions in the Middle East and Putin's war in Ukraine approaching its third year, Sommers emphasized the commanding presence of American oil and natural in the global market and the energy security benefits it provides.

“With wars in multiple energy-producing regions and threats to shipping in places like the Red Sea, the stakes are high.” Sommers said. “It has never been more important for America to emerge as the runaway top supplier of both crude oil and natural gas. It's thanks to places like Lea County, New Mexico, which produces more oil than five OPEC nations combined.”

Sommers discussed how hydraulic fracturing has transformed U.S. energy production and the need for policies like those outlined in Five-Point Policy Roadmap to secure American energy leadership and help reduce inflation.

“'Fracking' has become a litmus test for candidates—no one can win the presidency without supporting this critical breakthrough technology,” Sommers said. “It's not just about getting product out of the ground. … The next administration must focus on protecting consumer choice, fixing our broken permitting system, restoring permits for LNG exports, expanding access to our vast energy resources and advancing sensible tax policy.”

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Alex

Economic

A group of institutional investors managing over $3.5 trillion in assets has called on Korea's Financial Services Commission (FSC) to establish a clear roadmap for sustainability-related disclosures and to implement a phased approach to climate disclosures by 2026, according to sources, Tuesday.

The significance of such as push stems from the participation of global institutional investors, according to the Asia Investor Group on Climate Alliance (AIGCC), which delivered the letter, Monday. Among these investors is Legal and General Investment Management, managing approximately $1.4 trillion, Schroders with $1.01 trillion and Fidelity International with $862 billion in assets.

"We are deeply concerned that the implementation of mandatory sustainability-related disclosures in Korea has been postponed until after 2026, with pending uncertainty on the exact year of implementation," the letter stated.

"If businesses in other markets are providing sustainability-related disclosure while such reporting is delayed for Korean companies, global investors will struggle with benchmarking corporate performance due to a lack of comparable data and transparency. We believe this will not be conducive to the broader objective of the Korean Corporate Value-up and could even lead to a broader sense of the Korea discount phenomenon."

In April, Korea announced the draft of the guidelines for sustainability-related disclosures. But it did not disclose key details such as the timing of the mandatory disclosures, or whether Scope 3 greenhouse gas emissions (indirect emissions from a company's value chain such as employee's commuting) would need to be disclosed.

The process has been slow due to a lack of public interest and ongoing governmental issues, such as the Corporate Value-up Program, which aims to boost the stock market by improving corporate governance.

Meanwhile, the European Union, the United States, Singapore and Canada have already set timelines for mandatory sustainability disclosures between 2025 and 2027, with many investors already integrating climate risks and opportunities into their portfolio decisions. Companies are also urging the finalization of the guidelines as soon as possible so they can prepare accordingly.

The group of investors specifically called on the FSC to announce a clear roadmap of mandatory sustainability-related disclosures by the end of 2024 and mandate disclosure for listed companies with assets over 2 trillion won ($1.4 billion) by 2026. They also highlighted the importance of publishing an English version of Korea's disclosure standards and requiring companies to provide disclosures in English.

The investors emphasized that expediting the timeline for mandatory sustainability-related disclosures would not overly burden large listed Korean companies, as more than half of them have already committed to voluntary sustainability reporting in 2023.

"We are certain that these will lead to a 'Climate Value-up' for Korean companies, shareholders and the entire Korean market."

The AIGCC said it will continue to work with investors active in Korea through the Korea Working Group, established in July 2024.

"Having Korean reporting standards align with international frameworks will boost investor confidence in investing in Korean companies, fostering greater capital inflows and supporting sustainable economic growth. This would also enhance Korea’s corporate transparency and competitiveness in the global capital market," AIGCC CEO Rebecca Mikula-Wright, said.

Source: Koreatimes

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Swissquote

Central Bank

Economic

In focus today

From the US, NFIB’s Small Business Optimism index is due for release for September. Markets focus especially on employers’ perception of labour market conditions. Fed’s Bostic will speak this evening.

In Sweden, we receive preliminary inflation figures. We expect CPI, CPIF and CPIF excluding Energy to print 0.2% m/m and 1.6% y/y; 0.3% m/m and 1.1% y/y; and 0.3% m/m and 1.9% y/y, respectively. Our prediction for CPIF is 0.1 percentage points higher than the Riksbank’s forecast and CPIF ex energy is spot on. The flash estimate will include only the monthly and annual changes, reserving the detailed breakdown of components for the regular release.

In Germany, we look out for the industrial production data for August. Industrial production has been on a declining trend for the past year and survey data suggests the weakness persisted in August. The hard data on production in Germany will be important for the growth assessment which continues to look bleak.

On the night of Wednesday, we expect the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate by 50bp. Analyst consensus is divided between 25bp and 50bp moves, but markets have almost fully priced in the larger cut.

Economic and market news

What happened overnight

In China, the chairman for the National Development and reform commission said that the Chinese government is fully confident that it will reach its economic and social development goals for this year and said that some of the 2025-budget will be issued this year to support projects. Since late September the government pushed economic stimulus package to support the economy. The key to turning the Chinese slump is to put a stop to the housing crisis, which we see as the epicentre of current challenges. We now look for a gradual improvement in housing over the next year but not a fast rebound. Last week we revised up our Chinese growth forecast from 4.8% to 5.2% in 2024, see Research China – Lift to GDP forecast after leaders draw line in the sand, 2 October. Investors were disappointed by the lack of detail in the plans and offshore stocks corrected sharply lower by more than 5%. However, it follows a strong rally of close to 40% in two weeks.

What happened yesterday

In the Middle East, fighting between Hezbollah and Israel intensified yesterday, one year after Hamas attacked Israel on 7 October last year. Hezbollah said it targeted a military base south of the Israeli city Haifa with missiles. Israel confirmed the attack. We are yet to see Israel’s counter-attack to Iran’s missile barrage a week ago. Israeli response is likely to determine the course forward in the conflict.

In the euro area, the investor morale measured by the Sentix index increased in October, after a decline the previous three months. Despite the increase investor morale is still at relatively low levels.

In Germany, factory orders fell more than expected, hinting that German manufacturing sector is not set to recover in the coming months. Orders fell 5.8% (consensus: -2%, prior: 2.9%). Later today, it will be interesting to see how industrial production performed in August in the light of the disappointing order flow.

Equities: Global equities, or to be more precisely, US equities were lower yesterday, dragging down global indices. Conversely, European, Far Eastern, and Japanese markets were all higher. Examining the sector returns from yesterday provides a clear insight into the prevailing market dynamics. During a sell-off session, with utilities performing the worst, one typically needs to consider the bond market, where the hawkish repricing of the Fed continued. Additionally, a soaring oil price and the US election now less than a month away contributed to the rising uncertainty, pushing the VIX towards the 23 level. Thus, the US election might well be a “sell the rumours, buy the fact” event. The main US indices yesterday were as follows: Dow -0.9%, S&P 500 -1.0%, Nasdaq -1.2%, and Russell 2000 -0.9%. This morning, a stock price bonanza is continuing in China. With the conclusion of the Golden Week trading holiday, mainland shares are soaring (up around 5% at the time of writing). The flipside is that H-shares in Hong Kong are down 5%, as the Chinese authorities have not yet followed up with stimulus measures post the Golden Week holiday. European futures are down significantly this morning, catching up to the US’s late cash action yesterday. US futures are close to flat.

FI: The repricing of monetary policy expectations continued Monday as global bond yields continued to rise on the back of the stronger-than-expected US labour market data last week and rising oil prices. Hence, the US curve flattened from the short end with 2Y Treasuries rising some 8bp, while 10Y and 30Y Treasuries rose 5-6bp. We saw the same picture in the Europe with rising bond yields, but where the periphery underperformed modestly the core-EU especially in the front end of the curve as the Schatz ASW-spread widened some 2bp.

FX: EUR/USD has been consolidating just below the 1.10 mark in a quiet start to the week, with the broad USD index showing little change after its best week in two years. EUR/GBP moved higher with the KPMG/REC report showing further signs of wage growth cooling and softness in the labour market. Yesterday’s slightly more expansionary than expected fiscal budget in Norway, the global rates-environment and higher oil prices contributed to a substantial rise in short-end NOK rates which in turn lifted NOK FX. NZD/USD continued to edge lower yesterday ahead of Reserve Bank of New Zealand’s (RBNZ) rate decision early tomorrow morning.

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Warren Takunda

Stocks

Shares soared Tuesday in Shanghai as Chinese markets reopened after a weeklong holiday but then gave up a chunk of their initial gains as officials in Beijing outlined details of plans to revive the world’s second-largest economy.

The Shanghai Composite index was up 5.5% at 3,519.88 and in Shenzhen, Japan’s smaller market, the main index gained 5.3%. The Shanghai benchmark initially gained 10% but fell back as officials of China’s main economic planning agency briefed reporters about a slew of policies announced earlier meant to address key problems such as a property market slump.

Hong Kong’s Hang Seng sank 5.8% to 21,758.45 as traders sold to lock in profits from recent gains.

“China’s markets rally has hit a wall, leaving investors deflated. The reopening surge from the week-long holiday barely had time to gather steam before fizzling out, and now the once-thrilled bulls are licking their wounds,” Stephen Innes of SPI Asset Management said in a commentary.

Elsewhere in Asia, markets were mostly lower.

Tokyo’s Nikkei 225 index lost 1.2% to 38,861.09. as the dollar fell to 147.91 Japanese yen from 148.18 yen. A weaker yen tends to push share prices higher.

The Kospi in Seoul declined 0.5% to 2,596.38. Australia’s S&P/ASX 200 edged 0.2% to 8,187.10.

On Monday, U.S. stocks slid after Treasury yields hit their highest levels since the summer and oil prices continued to climb.

The S&P 500 dropped 1% to 5,695.94 and is still close to its all-time high set a week earlier. The Dow Jones Industrial Average fell 0.9% to 41,954.24, coming off its own record. The Nasdaq composite sank 1.2% to 17,923.90.

It’s a stall for U.S. stocks after they rallied to records on relief that interest rates are finally heading back down, now that the Federal Reserve has widened its focus to include keeping the economy humming instead of just fighting high inflation. A blowout report on U.S. jobs growth released Friday raised optimism about the economy and hopes that the Fed can pull off a perfect landing for it.

When Treasury bonds, which are seen as the safest possible investments, are paying more in interest, investors become less inclined to pay very high prices for stocks and other things that carry bigger risk of losing money.

It’s more difficult to look attractive to investors seeking income when a 10-year Treasury is paying a 4.02% yield, up from 3.97% late Friday and from 3.62% three weeks ago.

The yield on the two-year Treasury, which more closely tracks expectations for the Fed, jumped more on Monday. It rose to 3.99% from 3.92% late Friday.

Treasury yields may also be feeling upward push from the recent jump in oil prices. Crude prices have been spurting higher on worries that worsening tensions in the Middle East could ultimately lead to disruptions in the flow of oil.

Brent crude, the international standard, shed $1.23 to $79.70 per barrel. It had jumped 3.7% Monday. Benchmark U.S. crude, meanwhile, slipped $1.24 to $75.90. It also gained 3.7% on Monday.

Stocks that are seen as the most expensive can feel the most downward pressure from higher Treasury yields, and the spotlight has been on Big Tech stocks. They drove the majority of the S&P 500’s returns in recent years and soared to heights that critics called overdone.

Apple fell 2.3%, Amazon dropped 3% and Alphabet sank 2.4% to act as some of Monday’s heaviest weights on the S&P 500.

An exception was Nvidia, which rose another 2.3%. It rode another upswell in excitement about artificial-intelligence technology after Super Micro Computer soared 15.8% after saying it recently shipped more than 100,000 graphics processing units with liquid cooling.

If Treasury yields keep rising, companies will likely need to deliver bigger profits to drive their stock prices much higher, and this week marks the start of the latest corporate earnings reporting season.

Analysts say earnings per share grew 4.2% during the summer for S&P 500 companies from a year earlier, led by technology and health care companies, according to FactSet. If those analysts are correct, it would be a fifth straight quarter of growth.

In other dealings early Tuesday, the euro rose to $1.0986 from $1.0977.