Global CEOs See Recession, But One That's Only 'Mild and Short'

(Wednesday Market Open) What a difference a day makes. After yesterday’s market thinking that the Federal Reserve might finally have enough evidence to slow its pace of rate hikes, Wednesday’s September jobs report from ADP and international trade balance numbers offered fresh negative signals for continued inflation and potential global recession. We’ll want to keep an eye on the OPEC+ events in Vienna, too.

Stock futures were already headed into the red when ADP’s September employment report came in at a hotter-than-expected 208,000 hiring number for September, with not just an increase in job growth but wages as well. As many consider ADP’s numbers a precursor for the government’s monthly payroll report, keep an eye on labor force participation in Friday’s payroll numbers.

Also, U.S. trade balance figures narrowed more than expected for August, indicating that the clear-up in recent shipping rates may be more about demand destruction than supply chains straightening out.  

While Asian markets closed ahead, European shares were headed down by midday. 

Before the open, oil was near $87 a barrel while the U.S. 10-year Treasury yield inched upward to 3.715%.

All that said, the Cboe Volatility Index® (VIX) was still just below 30 this morning. 

Potential Market Movers

Beyond the ADP and trade numbers, mortgage applications are now at their slowest pace since 1997, according to this morning’s figures from the Mortgage Bankers Association (MBA). With 30-year fixed mortgages now at a national average of 6.89% according to Bankrate, the MBA said overall applications are down 14.2% from the previous week; the association did note some falloff might be due to widespread closings and evacuations last week due to Hurricane Ian.  

Premarket shares of Twitter TWTR were moving slightly lower after yesterday’s 22% jump following Tesla TSLA CEO Elon Musk’s offer to close his acquisition of the social media company on the original terms, according to media reports. On Tuesday, TWTR shares closed near $52, just below the $54.20 per share price in the deal. This is a volatile stock right now, so consider using extra caution if you plan to trade it.

Tuesday brought the first labor data from this week’s trio of job-related reports, and bullish investors got exactly what they wanted. The August JOLTS job openings report showed a little more than 10 million open positions, down from a revised 11.17 million in July. It could be a sign that the job market is cooling down instead of firing up more inflationary worries, and it contributed to Tuesday’s stock market gains.

But JOLTS is just the first of three labor-related reports, with initial jobless claims due tomorrow and the cherry on top coming Friday with the September payrolls report. Analysts expect initial claims to rise just a bit to 203,000 for the most recent week, according to the Briefing.com consensus, up from last week’s five-month low of 193,000.

In a snapshot, analysts expect the payrolls report to show September jobs creation of 250,000, down from 315,000 in August but still a very robust figure (see more on the jobs report below).

In a perfect world, of course, it’d be best if anyone who wanted a job could have one. However, the market’s concern is that an extremely tight jobs market might push wages and prices higher, exacerbating the inflation problem initially fueled by the pandemic recovery, supply chain snafus, and the Russian-Ukraine war. If job growth again surpasses estimates in September, it likely puts more pressure on the Fed to hike rates another 75 basis points in November.

As of Tuesday, the CME FedWatch Tool projected a 66% chance of a 75-basis-point November hike, practically unchanged from a week ago despite this week’s market rebound. One aspect of Wall Street’s comeback appears to be hopes that the Fed might “pivot” and consider either less-hefty rate hikes or a pause, but nothing Fed speakers have said this week shows any indication of that. The futures market continued to also show a 66% chance that the year will close with the Fed’s target rate between 4.25% and 4.5%, up from between 3% and 3.25% now.

All this kind of goes against this dovish narrative from the “pivot crowd” on Wall Street.

So does the current nearly 50-point yield curve inversion between the 2-year Treasury yield and the 10-year Treasury yield (TNX), which is near historic highs. Consider keeping a close eye on this inversion in coming weeks because it’d likely narrow if the Fed actually started to sound more dovish. As noted, there’s absolutely no sign of that right now.

Conagra (CAG) and McCormick (MKC) report Thursday. This will be a good chance for investors to hear from companies in the food industry about price and supply issues. Rising food prices factored into the surprisingly bearish August Consumer Price Index (CPI) report, with food costs up 0.8% for the month and 11.4% year over year. The next CPI report is due October 13.

Reviewing the Market Minutes 

The S&P 500® (SPX) rose more than 3% on Tuesday to 3,790, the Dow Jones Industrial Average® ($DJI) increased 2.8% to 30,316, and the Nasdaq® climbed 3.3% to 11,176.

Many sectors and stocks that got beaten down during September’s swoon rebounded Tuesday as a “buy the dip” mentality appeared to return to Wall Street. Semiconductors, casinos, cruise lines, airlines, and car companies were among the beneficiaries. 

General Motors (GM) rose nearly 9%, Norwegian Cruise Line Holdings (NCLH) jumped 16%, Caesar’s Entertainment (CZR) climbed nearly 11%, and Nvidia (NVDA) rose almost 5%.

Energy took the pole position in SPX sector performance Tuesday for the second straight day as WTI crude oil prices rallied to above $86 per barrel, up about $10 from recent lows, ahead of the OPEC+ meeting. Rising crude prices could be an inconvenience for the Fed as it tries to bring inflation down.

Other leading sectors yesterday included materials, financials, and consumer discretionary. These sectors tend to do better when investors show a rising risk appetite. So-called “defensive” sectors like utilities and consumer staples were among the worst performers Tuesday.

The PHLX Semiconductor Index (SOX) rose a solid 4.4% after a nearly 4% rise on Monday but remains 38% below its December peak. This index is a good one to monitor if you’re trying to assess consumer demand for products that use semiconductor chips like cars and video games.

The Cboe Volatility Index® (VIX) declined to around 29 by late Tuesday, but that’s still historically pretty high and could indicate more choppiness ahead. The U.S. Dollar Index ($DXY) fell to around 110, down from highs near 115 last week.

CHART OF THE DAY: CHASING AVERAGE. The SPX (candlesticks) made big strides for the second straight session Tuesday and is nearing its 20-day moving average (purple line). However, the 50-day moving average (blue line) is up above 4,000 but is still a long way off. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Elephant in the Room: Friday’s September payrolls report looms over the markets today and tomorrow. We won’t know the data until Friday morning, but the next two days could see choppy, nervous trading ahead of the data without a lot of conviction. That means if you’re trading, watch for volatility and make sure you’re comfortable with position sizes and any stops you set. As noted above, analysts expect September jobs growth of 250,000, down from 315,000 in August. The market would likely welcome a lower number out of hope that slowing job growth means the Fed’s tighter policies have begun to work and that fewer rate hikes might be needed. But it’d take more than just one monthly jobs report to make that kind of conclusion. The Fed likely wants to see several months of slowing data and appears well on the way toward another 75-basis-point rate hike in November.

Who’s Worried? Many investors are wary about a possible recession, and global CEOs agree there could be one on the near horizon. More than eight out of 10 CEOs anticipate a recession over the next 12 months, according to Tuesday’s KPMG 2022 CEO Outlook report. The difference is investors seem rattled by the past month’s market performance while CEOs seem confident the economy can weather a slowdown. More than half (58%) of the 1,300 CEOs surveyed at large global businesses expect any recession to be “mild and short.” KPMG said it also seems optimistic about long-term growth and its own companies’ prospects. That doesn’t mean it thinks a recession will necessarily be benign as 71% feel a recession will impact earnings by up to 10%, while 73% think it will interrupt anticipated growth. That said, 73% are confident the economy will be resilient over the next six months, up from 60% who felt that way back in February as measured in a different KPMG CEO survey.

Beyond the Headline: The headline jobs number gets the most attention the day of the payrolls report, but there’s a lot more to it. First, keep an eye on any revisions the Labor Department might make to previous reports. The three-month average jobs growth is really a better figure to track than the monthly one because it gives a broader look into job creation over a longer period with any bumps smoothed out. The current three-month average is 378,000, which would’ve been considered monstrously huge in pre-pandemic days when jobs growth of 200,000 represented a solid monthly report. Let’s see if the new three-month average falls significantly because that would probably give the market more room to breathe. Another figure to watch is wage growth, which the Fed watches closely for signs of inflationary expectations taking hold. Wall Street consensus is for another 0.3% rise in hourly earnings, even with the August gain. Lower wage growth than that might not be welcome if you’re an hourly employee, but the market would probably be relieved.

Notable Calendar Items

Oct. 6: Earnings from Conagra (CAG) and McCormick (MKC)

Oct. 7: Nonfarm Payrolls, Wholesale Inventories, and earnings from Tilray (TLRY)

Oct. 11: Earnings from PepsiCo (PEP)

Oct. 12: September Producer Price Index (PPI)

Oct. 13: September Consumer Price Index (CPI), earnings from Delta (DAL), Domino’s (DPZ), and Walgreen’s Boots Alliance (WBA)

Oct. 14: September Retail Sales, October Preliminary University of Michigan Sentiment, and earnings from J.P. Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Morgan Stanley (MS)

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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