October has lived up to its billing as the most volatile month of the year as from September 30th through October 5th. The S&P 500 alternated between gains and losses of at least 1% over four straight sessions, the longest stretch since June 2020. Despite that volatility, however, the net impact was only a decline of -0.3%, before stocks strengthened into the end of the week on news from Washington DC of a debt limit extension. As a result, the S&P 500 rebounded off September’s oversold conditions to finish this week up about 1%. Heading into the weekend, investors will be circling next week’s producer and consumer price index reports as well as the third quarter earnings season that unofficially kicks off on Wednesday with data and commentary from JPMorgan and Delta Airlines.
Taper Timeline Shift?
Most economists and market participants expect the Federal Reserve to officially announce the tapering of its $120B in monthly asset purchases following the Fed’s next meeting on November 2-3, but Friday morning’s jobs report for September potentially muddied the waters. Despite Fed Chair Jerome Powell saying just a couple weeks ago that conditions for tapering had been “all but met”, September payrolls were a major disappointment, rising only 194K, the lowest since December 2020, and significantly below consensus expectations for 479K jobs (per FactSet). The unemployment rate did fall from 5.2% to 4.8%, but this was largely due to workers dropping out of the labor force, something that is particularly noteworthy considering all of the recent labor shortages.
Interest rates, however, rose on the weak jobs data, as the report adds fuel to a growing stagflation narrative of slowing growth, but high inflation. As a result, the yield on the 10-year US Treasury broke out above 1.6% for the first time since June 4th and bond markets seem to be implying that inflation is perhaps more concerning for the Fed than a slowing labor market recovery, and the schedule for tightening monetary policy is therefore unchanged. Stocks mostly took the news in stride and finished Friday’s market session only slightly lower, but we wouldn’t be surprised to see increased market volatility should that 10-year yield get closer to the March 2021 highs around 1.75%. We continue to believe the Fed’s tapering intentions will be officially announced on November 3rd, but Friday’s weak jobs data likely makes next Wednesday’s consumer price index (CPI) and Thursday’s producer price index (PPI) data releases all the more important as markets look to gauge the trajectory of inflation and how it might factor into future monetary policy decisions.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO