Our heartfelt prayers go out to all those impacted by the barbaric invasion of Israel, and we are shocked by the unspeakable atrocities enacted by Hamas. If it is proper to measure people by their actions and not their words, it is clear that terrorists like Hamas, have no desire for peace but seek only to terrorize and control others. This should remind all Americans of the beauty of our Constitution, the purpose of strong borders, and the need to fight terrorism wherever it exists. We will never forget, and we pray for Israel and all those who believe in and fight for democracy and peace.

It is difficult to write about equities when the newswires are dominated by the war taking place in Israel. Particularly since Syrian shells, purportedly shot by a Palestinian faction, landed in Israeli territory on Tuesday and Israel responded by firing back. This points to the risk of the Gaza-Israeli war spreading in the Middle East, and as a result, it is currently overshadowing the Russia-Ukraine war, where again, a sovereign nation was invaded by Russia. Ironically, wars are not usually bad for equity markets, however, note that neither war has been good for the equity markets of any country involved. However, it is a positive for defense stocks, particularly for makers of bullets and missiles, and since both the Middle East and Russia are oil exporters, it has been good for energy stocks.

Israel has also pushed important news about China into the background. Country Garden Holdings Co. LTD. (2007.HK – 0.75) announced it had defaulted on a principal payment which sets the stage for one of the country’s largest debt restructurings. Simultaneously, China Evergrande Group (3333.HK – 0.265) failed to get regulatory approval for its offshore debt restructuring proposal which will likely lead to its liquidation at a hearing set for October 30. The potential debt defaults of China’s two largest property developers will have devastating impacts on stakeholders, customers, supply-chain vendors, China’s economy, financial creditors, and to a lesser extent, holders of China’s US dollar-denominated bonds. Therefore, we are not surprised that Fed officials are sounding more dovish this week. An unstable world is not the right environment for another rate hike, particularly since previous rate hikes are already having an impact on consumers.

Decoding Employment Data

September’s employment report was a huge surprise, Not only was the addition of 336,000 jobs nearly double the consensus expectation, but revisions added 79,000 jobs in July and 40,000 jobs in August. This means that employment was 119,000 higher than previously reported, which makes one wonder how rigorous government data really is. Moreover, September’s year-over-year job growth was 2.1% in the establishment survey and 1.7% in the household survey. These percentages are both well above their long-term averages of 1.7% and 1.5%, respectively. See page 3. September’s 336,000 new jobs also lifted the 6-month average by nearly 20,000 to 233,670 which is well above the 50-year average of 128,000 new jobs per month. Charts of the labor force and employment show that there has been a steady increase in both since the end of the Covid lockdown. See page 4.

From a historical perspective, the US economy is at risk of a recession whenever job growth turns negative. But since job growth in September was definitely robust, it appears that the US economy is not at risk of slipping into a recession any time soon. This could support those who are expecting the US economy to remain in a lengthy period of stagflation.

However, some details in September’s job report tell a slightly different story. Multiple job holders increased by 368,000 in the month, suggesting that holding one job is not sufficient for some individuals and households. Meanwhile, those working part-time for economic reasons fell by 156,000. It is unclear if part-time workers found full-time jobs or are now holding two jobs. See page 5.

In September, average weekly earnings rose 3.6% YOY for all private industries and increased 3.7% YOY for production and non-supervisory employees. These statistics raised concern that wage growth is now fueling inflation. However, since inflation has accelerated in recent months it means that real hourly earnings have decelerated. For example, average hourly earnings grew 4.5% in August and 4.3% in September. This means that real hourly earnings rose 0.8% YOY in August and potentially rose 0.65% in September — if inflation does not increase from August’s 3.7%. See page 6.

The CPI for September will be reported later this week, and we fear it may be disappointing. After eight straight months of year-over-year declines in oil, the WTI rose more than 14% YOY in September. This jump in energy prices could easily create a higher-than-expected headline number in the CPI. In short, the 5-month stretch during which earnings grew faster than inflation may have come to an end in September. This will be a handicap for consumers.

September’s ISM data was interesting, and it showed a switch in the normal pattern. The ISM manufacturing index displayed more upward momentum than the service index. Yet even though the headline index for ISM manufacturing rose 1.4 points in September, its reading of 49 remained below 50 for the eleventh consecutive month. The headline ISM services index fell 0.9 to 53.6. Production, or business activity, rose 2.5 to 52.5 for manufacturing and rose 1.5 to 58.8 for services. New orders rose 2.4 to 49.2 in manufacturing but fell 5.7 to 51.8 in services. Manufacturing could get a boost from the defense industry in the months ahead and this could help both the economy and employment. See page 7.

Consumer credit growth slowed significantly in August. Overall credit balances grew 4.0% YOY versus 4.9% in July. Revolving credit grew 8.6%, down from 10.5% in July, and nonrevolving credit growth rose 1.8%, down from 3.1% in July. On a six-month rate of change basis, revolving credit contracted 0.2%, the first contraction since May 2016. It is not surprising to see credit card, or revolving credit, decline given that interest rates on credit card plans at commercial banks rose to 21.2% in August. However, it is important to note that sharp declines or contractions in consumer credit are signs of a recession. See page 8.

Technical Update

The Dow Jones Industrial Average and the Russell 2000 index are trading below their 200-day moving averages, the S&P 500 recently tested its 200-day average on an intra-day basis and Nasdaq Composite continues to trade well above its long-term average. Nevertheless, the major chart patterns remain characteristic of a long-term neutral trading range, best seen by the 1650-2000 range in the Russell 2000. If the Russell 2000 breaks well below the 1650 support, it would be bad news, but this is not our expectation. The 25-day up/down volume oscillator is at a neutral reading of negative 1.92 this week but has been oversold for three of the last five trading sessions with readings of negative 3.0 or less. This oscillator failed to confirm the July advance and we would not be surprised if it fails to confirm the recent decline with five consecutive oversold days. To date, the longer-term trend remains neutral.

Gail Dudack

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PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.

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