The changes for the week (ending November 1) in the major equity indexes were negative (the DJIA and Russell 2000 only slightly so); and the indexes showed significant volatility. It’s almost as if the market has paused and can’t decide if it should go up or down. Through Wednesday, the S&P 500 was flat versus the previous Friday’s close (October 25). Then it plunged -108 points on Thursday and recovered about 22% of that fall on Friday (+23 points). That left it down -1.4% for the week. It was similar for the Nasdaq, while the DJIA and Russell 2000 were flat when compared to the week prior.
Five of the Magnificent 7 were negative for the week. Only AMZN and GOOG managed to gain.
As one can see from the table, all are below their peak levels, with only AMZN within striking distance.
Some of the recent volatility and negative reaction in the equity markets can be traced to the disappointing guidance from Microsoft and Meta, with the latter indicating huge capital investments in the AI and infrastructure spaces in 2025.
It was a big data week. We had reports of Q3 GDP, October Payroll data, and the PCE Deflator.
GDP and Payrolls
GDP advanced +2.8% in the third quarter, slightly below the Street’s +3.0% expectation. Still, this was interpreted as “solid” growth. The results were driven by a strong consumer and government deficit spending.
Then on Friday, Non-Farm Payrolls (NFP) (Establishment Survey) showed a meager +12K total job growth. Despite the softness, the U3 Unemployment Rate stayed at 4.1% as the labor force (the denominator in the unemployment calculation) also shrank.
While the Bureau of Labor Statistics (BLS) indicated that its counting process wasn’t impacted by the Hurricanes, the number clearly was. In addition, Payrolls were likely impacted by the port-worker and Boeing labor strikes. This was a very weak labor report, especially considering that the August job number was reduced by -81K (from 159K to 78K) and September’s was lowered by -31K (from 254K to 223K). We note that in 2024, there have been downward revisions to NFPs in eight of the ten reporting months of 2024 which speaks to the weakening trend we see in today’s labor markets.
The Temporary Help category has always been an indicator of the strength of the labor market. In this latest report, Temporary Help workers declined by -49K. Even the Leisure/Hospitality count, another labor market strength indicator, fell -4K. In addition, there were small declines in the Retail and Transportation/Warehousing sectors.
The Household Survey was even weaker, falling -368K with Full-Time positions off -164K (and down -0.7% year/year). Part-Time positions fell more than -200K. The only reason why the U3 Unemployment Rate stayed at 4.1% was because the labor force itself (the denominator in the unemployment calculation) fell -220K.
It is likely that the job market is even weaker than what we’ve already spelled out. The next chart shows that if the Government and Health Care & Social Assistance sectors are eliminated, October was a disastrous month for private sector employment. Note the negative numbers in Manufacturing (another sign that the sector is in Recession) and in Professional and Business Services (a proxy for Part-Time employment). The softness in the latter indicates just how weak the labor market has become.
The left side of the next chart shows the rapid fall in the Voluntary Quits Rate, now below pre-pandemic levels. When voluntary quits rise, it is a sign that there are plenty of jobs available. But the reverse is also true. As shown, voluntary quits and job openings are highly correlated, and it is quite clear that the jobs market has cooled from its “hot” pace in 2022 and is approaching normal. Our worry is that it will continue to fall below that normal range. Time will tell.
Inflation
The inflation news continues to be positive. The headline Personal Consumption Expenditure (PCE) Index was +0.2% for October and +2.1% from a year earlier. That’s down from 2.3% in September and is almost right on the Fed’s +2.0% per year target. That should not be an obstacle for a -25-basis point move at the upcoming Fed meeting (November 6-7). As shown on the charts, both the PCE and Core PCE indexes continue to disinflate. As we’ve written in this blog over the past several months, the CPI Index, due out November 13th for October, will be moderating, as the lagged rents used by BLS are likely to be showing negative readings.
Yields
Since the end of September, yields have spiked. This was likely due to the +2.8% growth in GDP in Q3 and the Street’s expectation that such growth will continue. As shown above, the labor market is weakening, and, data shows that consumers spending growth (+3.3% in the May to September period) has been far beyond their advancement in income (+1.1%). The chart below shows the resulting spike in yields.
Final Thoughts
Q3’s GDP advance of 2.8% would seem to indicate that the economy is strong and growing. The consumer seems healthy and has been the major growth driver followed closely by government deficit spending. But, from our lens, economic growth appears to be slowing. Look no further than the labor market where October’s Nonfarm Payrolls came in at a scant +12K, and that was after BLS’s +76K add-on from their Birth/Death model. (The WSJ recently reported +11K in small business bankruptcies in 2024, the highest number in decades.)
The October jobs data showed a loss of -46K jobs in the Manufacturing sector in October, adding more credence to our Recession call for that sector. In addition, the Voluntary Quits rate continues to fall accompanied by falling job openings further validating our weakening jobs market view.
Inflation continues to cool with the Fed’s favorite gauge (the PCE deflator) showing up at +2.1% year/year, a whisker away from their +2.0% goal. Due to the use of lagged rental data, we see good inflation numbers forthcoming in the CPI (November 13th).
Finally, the initial +2.8% GDP reading for Q3 and the prospect for continued growth caused interest rates to spike in the later part of October. The immediate outlook for interest rates is tied to what the Fed does at its upcoming (November 6-7) meeting. A -25-basis point reduction is likely to calm fixed-income markets and lower yield curves.
(Joshua Barone and Eugene Hoover contributed to this blog.)