So this Friday we had a baffling job report. Analysts & economists alike have really been struggling to come up with any sort of realistic estimate for the past two months. Why? Well, as unemployment benefits came to an end and back-to-school season took hold, analysts were expecting a strong job report, particularly in the education sector. Lo and behold, the US economy only added 194K jobs vs ~ 500K expected. Now why do I even bother writing about the jobs report ? Well it’s simple, Fed Chair Powell said earlier last week that even a decent job report would all but confirm tapering in November. However, given the weak job report, should we expect tapering to commence in November? I’d argue yes, and I believe the bond market is also signaling that. The 10-year bond yield has risen to 1.6% from below 1.3% just three weeks ago. This is not due to lift off but a possible fuel-driven inflation, forcing the Fed to taper. And I don’t think that’s bad for the markets. It is crucial to note that $120B monthly purchases of treasuries and MBS will not have an impact on employment. I think the markets have been digesting a potential tapering in November and that rates should settle between 1.7-1.8% by year end.
Now I’m not all negative. I think many layers of uncertainty are falling apart, slowly but surely. The number of ships waiting in line outside of Los Angeles has fallen to around 55 from 80 just a week ago. Furthermore, the price of a 40 ft container on Shanghai-LA route has fallen to below $10K from $18K just this past week. Why? Well, many of the larger corporations ordered higher quantities well in advance to prepare for the holiday season- a very similar scenario to when everyone rushed to Costco to buy toilet paper! We had enough for everyone but people were hoarding, hence leading to a shortage. Supply chains should fairly normalize by Q2 2022.
Anyways, I won’t keep this going for too long; earnings season starts next week and investors are a bit nervous. However, for the past couple of months the negative sentiment regarding lower sales/margins due to supply chain issues & inflation has been baking into the market. Typically, entering earnings season with such pessimism can lead to a surprise to the upside. I think that could very well be the case.
Happy Thanksgiving my fellow Canadians!