10 Weekly Observations

  1. The S&P 500 index this week rallied by 2% from its YTD low of 3,586
  2. 3Q reporting season starts next week and consensus expects 3% year/year EPS growth, 13% sales growth, and 75 bp margin contraction to 11.8%.
  3. Headwind to sales due to a stronger US dollar
  4. Headwind to margins due to elevated inflation and high inventories
  5. Strategy to tax changes effective in 2023. Own stocks with high US sales vs. firms with high foreign sales
  6. Resilient US labor markets pressure Fed to continue aggressive hikes
    • First, the JOLTS report showed that job openings fell 1.1mn in August. As a result, the jobs-workers gap has now fallen from a peak of 5.9mn to 4.3mn today, roughly 40% of the way to the 2mn level that we think is required to slow wage growth to a rate compatible with the inflation target. While web-based measures of job openings suggest that the JOLTS series might have overshot a bit in August, they also show that openings continued to trend lower in September.
    • Second, despite the sharp decline in job openings, the layoff rate remained extremely low and the job-finding rate among the unemployed remained fairly high. As a result, the decline in total labor demand has so far come entirely from a decline in job openings rather than a decline in employment, and gross layoffs are not translating to an increase in net unemployment at an elevated rate, contrary to the perception that labor market matching has broken down.
    • Third, average hourly earnings growth remained softer in September and has run at a trend rate of 4.5% recently, consistent with future wage growth expectations from business surveys. This would take us only halfway from the 5.5% year-on-year rate of our wage tracker to the 3.5% rate that would be consistent with 2% inflation, and other wage indicators might come in firmer. But even a partial move in the right direction would likely help to persuade Fed officials that gradual labor market rebalancing can bring down wage growth and inflation over time.
  7. September PMIs: Sluggish GDP growth amid mfg. weakness
  8. Pressure is building for an early adjustment in BoJ policy
  9. Russia’s bridge to Crimea severely damaged by explosion
  10. Next week: September moderation in energy and core goods CPI

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