The drop in the jobless rate to 3.49% in September was the most important data point from Friday’s payrolls report. The unemployment rate is well below the Fed’s median estimate of the longer run unemployment rate (4.0%). There is little chance now that the unemployment rate will average 3.8% in Q4 as per the FOMC’s latest Summary of Economic Projections (SEP).
In this context, the OPEC+ production cuts, and the rise in WTI crude above $90/barrel, take on critical importance. The decision to reduce production targets by 2mn barrels a day was taken despite stiff opposition and extensive lobbying from the Biden administration. White House spokesperson Karine Jean-Pierre said it is becoming “clear” that OPEC+ was “aligning with Russia”.
Janet Yellen labelled the cuts to production as “unhelpful and unwise” over the weekend, and flagged the risks for emerging markets. It is a big problem for the Fed too, which will not be able to bank on large downward contributions to inflation from falling energy prices. Over the last week, energy stocks rose 13.9%, extending their YTD outperformance vis-à-vis the benchmark S&P 500 index to 94.9%. If WTI rises back towards $100/barrel, this will only add to the selling pressure on government bonds.
The BoE has taken further steps this morning, to ease market tensions, with “additional measures to support an orderly end of its purchase scheme”. But the UK experience has triggered concerns of margin calls spreading to the rest of Europe. Losses in commercial real estate and private equity are building. Data from ApeVue show that “the 50 most active private companies in the institutional market, including well known brands like Stripe, Impossible Foods and Klarna, lost 30.61% for investors up until October 1st.” This would put the declines on a par with the drop in the Nasdaq. The risks of a new 2022-low for the S&P 500 looms large.
