Talking Trade: Back To The Table This Week, But Will Big Issues Be Addressed?

How do you follow up a massive rally like the one we saw Friday? There doesn’t seem to be an answer early Monday, as stocks have a weaker tone but remain above a key technical support area. 

The level to consider watching is right around 2942 for the S&P 500 Index (SPX). That’s the 50-day moving average, and the SPX finished solidly above it on Friday. However, the futures market isn’t necessarily reading from the same playbook this morning, a sign that maybe the rally doesn’t have strong legs. 

It’s the last week before earnings season, so geopolitics could still play a big role in shaping performance. Talks with China start later this week, but media reports over the weekend suggest there’s doubt about how much China’s willing to talk about some of the major issues beyond just buying more U.S. soybeans and pork. China is “increasingly reluctant” to commit to reforms of industrial policy or changes to government subsidies, Bloomberg reported. It’s going to be interesting to see if the two sides can make any progress, and without the distraction of earnings until next week, any trade headlines could continue jolting the market.

Asian markets were mixed early Monday but European shares rose, and the bond market took a step back. The 10-year Treasury yield rose to 1.53% before the opening bell, and this is another marker to consider watching this week. The benchmark yield is just a few basis points above 1.5%, a level it hasn’t fallen below in more than a month. Any pullback in yields might suggest more trepidation about the economy.

Consider watching the Technology sector today for signs of possible strength, as both Apple Inc. AAPL and Nvidia Corporation NVDA saw analysts raise their price targets. The big earnings report to keep an eye on this week is Delta Air Lines Inc. DAL on Thursday. The company’s shares got hammered last week after DAL lowered Q3 guidance.

“Jobs Machine” Keeps Ticking

Friday’s payrolls data continued to show that the U.S. economy is a jobs machine. The report also suggests that in a tough global neighborhood, the U.S. continues to be the healthiest place to be. Yes, the report missed on the top-line number, but a three-month job creation average of 157,000 this late in the economic cycle is pretty impressive, especially when you factor in the ultra-low unemployment rate, which fell to 3.5%.

While manufacturing jobs didn’t gain in September, that’s a pretty volatile sector. Also, retail lost 11,000 jobs, mostly in clothing, but that probably won’t surprise anyone who’s been paying attention.

Meanwhile, health care and business and professional services saw strength, and the transportation and storage sector had a 16,000-job gain. That’s a huge number, and it means we’re still shipping stuff across the country. That conceivably reinforces the theory that consumers are healthy and probably can stay that way through a solid holiday season. After the calendar turns, all bets are off if there’s no deal by then with China. If that’s the case, we could face a day of reckoning.

“Just Right” Data Propels Friday Rally

From the way the market reacted Friday, it appears investors understood the message the data sent about the economic bed not being too hard or too soft. Hopes that the slower job and wage growth might help push the Fed into making more rate cuts appeared to be a big rally driver.

The  energetic rally made up a lot of the week’s earlier losses and, perhaps more significantly, pushed the S&P 500 Index back above its 50-day moving average by a comfortable margin. The moving average had been around 2942 entering Friday, but the SPX cleared it with about 10 points to spare. Closing that high above it could bode well for trading this week. That said, the SPX and the Dow Jones Industrial Average ($DJI) both suffered their third-consecutive losing weeks. 

If you want to get picky about payrolls, wage growth didn’t budge from August and the year-over-year wage rise dropped below 3% for the first time in months (see more below). That might partly reflect the composition of the new jobs added in September, many of which were in government and health care, not traditionally high-paying positions like construction and manufacturing. On the plus side, if wage growth starts to slow, that’s potentially one more reason why it might be hard for the Fed to argue against more rate cuts.

Job growth itself is slowing, and some analysts chalked it up to the trade war. There may be an element of that, though a full-employment economy like the one we’re in tends to see smaller monthly gains even when there’s no trade war. When unemployment drops to 3.5%, it can mean many companies have all the labor they need. It’s not uncommon to see 200,000 a month job growth in the beginning of a recovery, but it would be odd to continue seeing it go on and on forever. 

At the same time, it wouldn’t be prudent, to use an expression made popular by a former U.S. president, to completely discount the possibility that global weakness and trade tensions might ultimately affect the U.S. job market. If manufacturing data continue to disappoint, it might be time to start taking that into account. Retail sales data, due Oct. 16, could be important to watch as a possible sign of whether slower wage growth might be eating into consumer demand. We’ll also start hearing from Financial industry executives that week as earnings come in, and they often have a good sense of the mood on Main Street. 

The Cboe Volatility Index (VIX) is near 18, down from highs above 20 last week. With earnings and trade talks ahead, it wouldn’t be surprising to see more choppiness as the week advances.

Fed in Focus

It wouldn’t really be fair to finish talking about last week and payrolls without mentioning the potential Fed reaction. It’s still weeks until the Fed meets, and as one Fed official pointed out in an interview Friday, there’s a lot of data between now and then.

The futures market indicates 76% chances of a rate cut later this month. Those odds look pretty high, historically speaking. Additionally, odds of a second cut before the end of the year stand at approximately 40%. Fed Chairman Jerome Powell is scheduled to make brief remarks at 1 p.m. ET today, but it’s unclear if he’ll discuss anything too important. On Friday, he said the economy is in a "good place," in his comments at a Fed Listens event. And he added it is "our job to keep it there as long as possible." He didn’t really discuss policy or the economy. 

Rate cuts wouldn’t necessarily be a panacea for a market that hasn’t been able to make a new high since late July. That takes us back to the range of 2800-3000, which seems to be the mantra for the SPX. Without a trade deal, it seems hard to believe the market could move much above that anytime soon, rate cut or not, which is why it wouldn’t be surprising not to see a lot of follow-through from Friday’s fiesta.

One Possible Reason for Stagnant Wage Growth: The surprising thing about September’s jobs report might be how wage growth didn’t pick up despite the unemployment rate falling to 50-year lows. That’s where worries might start creeping in if the pattern continues. Typically in a full-employment economy—which we’re arguably in—workers demand higher pay and employers give in because labor supplies are tight and there’s competition for workers. That can sometimes mean higher labor costs getting passed along to consumers.

With inflation well under the Fed’s 2% goal, that doesn’t appear to be happening. It might be partly a function of more low-skilled workers jumping back into the job market after being absent from it for a while. Their wage demands wouldn’t necessarily be so high. The U6 unemployment rate, which counts both unemployed and underemployed workers, was 6.9% in September, down from 7.2% in August. That category might include some of those lower-skilled, long-term unemployed workers who are now working again.

Credit Check: Looking more closely at business health, corporate credit appears to be holding up pretty well. Some market watchers say credit is the vanguard for equities, and if that’s the case this time it might be a good sign. Falling 5-year and 2-year Treasury yields arguably speak to a relatively healthy credit environment for companies that want to borrow, and that could be helping support the stock market despite the weak manufacturing and service sector numbers we saw last week.

Credit and the Consumer: Speaking of credit, later today investors are scheduled to see the latest reading on consumer credit from the Federal Reserve. Consumer borrowing in August is expected to have increased by $13.3 billion, according to a Briefing.com consensus. The last reading we saw, for July, showed an increase of $23.3 billion as revolving credit, such as credit cards, grew at the fastest pace since November 2017. With the U.S. consumer in focus, the picture of consumer credit is important.

Although we’ve seen evidence of some headwinds in consumer spending, sentiment, and confidence data recently, it seems that the consumer overall is still pretty healthy and that could be behind the rise in consumer borrowing.

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