Will Sep payrolls affirm JOLTS showing softening labor? Both ISMs point to softer PPI and CPI ahead. HY relative strength is notable.

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Our latest “Fundstrat inflation dashboard” is updated.

This week, incoming data points to a concrete softening of the jobs market:

As the first week of October comes to an end, equities have managed to post solid gains. Those wary (most) view this as an oversold bounce. But given the significant moves in Fed funds futures, 2Y and 10Y yields, high yield spreads and even cyclical sector leadership, markets are suggesting fundamental improvements are behind the gains.

• August JOLTS (10/4) showed a 10% drop in openings (see note) bringing openings:worker ratio to 1.67, or 0.30 = labor market coming into balance
• Challenge job survey Sept (10/6) showed +68% rise in layoffs = labor demand softening
• Friday (10/7) is Sept payrolls = unknown
• Collectively this paints a picture of a softening labor market
• which is actually positive for equities

Why?

Foremost, the Fed is looking for progress on 3 fronts, before they reconsider their “war on inflation”:

• slowing GDP growth = check, it’s happening
• softening labor demand (via JOLTS) = check, progress
• significant progress on inflation = sort of as “soft indicators” show YES, but “hard data” NO

Given the data reactivity of markets, the Sept payrolls will carry a lot of importance.

QUESTION IN MARKET MIND: Is sticky inflation losing momentum?

One of the major questions on the market’s mind is whether sticky inflation, fueled by wage-related services, is losing momentum. This is one of the reasons this Sept payrolls report will carry so much weight.

LABOR: While labor markets are tight, US has not truly “exhausted” the supply of workers

The labor market is tight for two reasons: first, the economy is growing so there is demand for workers and second, the number of available workers is falling aka participation rate.

• participation rate today is 62.4%
• participation rate Feb 2020 was 63.4%
• participation rate 15 years ago was 66.4%
• there are 6 million fewer Americans in the labor force today vs 15 years ago
• additionally, there are 3 million migrants awaiting approval for their work permits

As shown below, the current wait for an I-765 authorization is 15 months:

• historically, 90% of these were approved in 3 months
• so, a lot more red tape today

PRIME AGE LABOR: Less “poaching” as US Prime Age labor set to rise in 2022 and beyond

One of the challenges for employers is sourcing skilled labor. Hence, the rise in “poaching” workers from other companies.

• Job switchers have the highest wage increase
• JOLTS openings surge since 2020 is mostly “poaching” (see prior notes)
• wage inflation can be contained if poaching slows

Fortunately, Millennials are providing a tailwind over the next decade. Below is the data from UN DESA/Census Bureau:

• the chart shows the annual change in the number of Americans age 35-60
• this figure stagnated 2011 to 2022 as Boomers retired
• and GenX was a smaller generation, so this figure stagnated
• but the Millennials are now turning age 35
• and contributing to a net increase in prime age workers
• Prime Age means workers with the highest skill sets

ISM PRICES: Both ISMs Manufacturing + Services point to a future decline in CPI

The Sept ISMs reported this week suggest producers are seeing a meaningful easing of price pressures. Take a look at the “prices paid” component below:

• falling for manufacturing -0.8
• falling for services -2.8
• 3 of 5 regions see a decline
• our team parsed thru the Kansas City and Dallas Fed reports and the common thread is labor costs are the higher “prices paid”

ISM PRICES LEAD: ISM prices falling leads both PPI & CPI –> “soft” leads “hard” data

Among the more important “soft” surveys are the ISM reports. To appreciate the leading indicator of ISM “prices paid,” take a look at ISM vs PPI (producer price index):

• ISM “prices paid” (grey line) tend to lead PPI (blue)
• the ISM component is advanced 6 months
• and this points to a drop coming in PPI
• when producers pay lower prices, these are passed onto consumers
• thus, the relationship higlighted below

Similarly, when combining ISM prices paid (combine manufacturing + services), we see this also leads CPI. Again, like the PPI above, this seems to suggest CPI should be cooling in coming months.

• the ISM prices paid is advanced 3 months
• this leads CPI YoY

STRATEGY: Markets still “data dependent” but seismic sell-off already taken place

Inflation remains the primary market focus, which is an obvious statement. And secondarily is the Russia-Ukraine war, which impacts markets via energy prices which makes the Fed’s job even harder. Hence, in this environment, markets are data dependent.

• the obvious statement
• if the Fed sees progress on the above 3 items, markets react positively
• if Russia-Ukraine war moves to an end game, markets react positively
• For the most part, investors agree with above, but for them, it is a question of timing
• why buy now, when they can buy when catalysts emerge
• we have already highlighted how 1982 experience showed that stocks reprice rapidly when the inflation risk abates
• hence, there is an argument for being early

But there has been so much de-risking, we continue to view the risk/reward skewed positively. Among the considerations:

• the “hard” data is converging on the “soft” data and the soft data points to slowing inflation
• this is evident in jobs (JOLTS), consumer goods, producer prices (ISM), supply chain (freight costs)
• one can glance at our “inflation dashboard” and see this
• fixed income markets are below Fed “dot plots” implying markets see less tightening than Fed
• and if incoming data supports falling inflation, this is a pretext for Fed to become less “hawkish” even in the face of their rhetoric
• markets have shown signs of extreme pessimism, best evidenced by the collapse in AAII sentiment
• signs of sharp buying reversals, such as the fact the Nasdaq 100 went “100% bid” this week
• 6 of 6 times since 1996, the $NDX showed positive returns 6M and 12M later
• even HY spreads have staged a divergence, as the HY OaS (options adjusted spreads) did not make new wides while equities posted a new low
• this was seen in 2008

Notice how HY spreads did not make a new wide this past week? Even as S&P 500 made a new low?

But this was a similar setup in 2009.

• high yield did not make a new wide March 2009 vs Oct 2008
• but the S&P 500 made a closing low March 2009 vs Oct 2008
• this divergence proved to be important in 2009
• credit led equities in 2009
• is this the same case in 2022?

33 GRANNY SHOTS: Updated list is below

The revised 33 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:

• $AAPL in 5 of 6 portfolios
• $GOOGL $MSFT in 4 of 6 portfolios
• $AMZN $META in at least 2
• This reinforces our favorable view of FANG in 2H2022

33 Granny Shot Ideas:

Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $TSLA

Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM

Communication Services: $GOOGL, $META

Energy: $CVX, $DVN, $XOM

Financials: $ALL, $AXP

Real Estate: $AMT, $CCI, $EXR

Health Care: $ABT, $BIIB, $ISRG, $MRNA, $REGN

Consumer Staples: $BF/B, $MNST, $PG, $PM

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33 Granny Shot Ideas: $AAPL, $GOOGL, $MSFT, $ALL, $BF/B, $CSCO, $NVDA, $PG, $PM, $ABT, $AMD, $AMT, $AMZN, $AVGO, $AXP, $AZO, $BIIB, $CCI, $CVX, $DVN, $EXR, $GPC, $GRMN, $ISRG, $KLAC, $META, $MNST, $MRNA, $PYPL, $QCOM, $REGN, $TSLA, $XOM

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