Shutdown Doldrums

• The government shutdown enters its sixth day with little sign of progress between the parties, so the data blackout continues into this week. To be fair, even with a fully functioning government in DC the offerings would have been sparse. We have managed, however, to round up some alternative data on the matter and discuss the findings below. Suffice it to say, labor market momentum continues to slow, but it’s in no hurry to do so. Meanwhile, yields are lifting slightly higher as a risk-on mood in equities and upcoming Treasury supply (3yr, 10yr, 30yr maturities) put some pressure on bids to open the week. Currently, the 10yr Treasury is yielding 4.16%, up 4bps on the day, while the 2yr note yields 3.60%, up 3bps in early trading.  

 

• On Friday we received another privately issued report in the form of ISM Services for September with the headline measure ticking lower from 52.0 to 50.0 vs. 51.8 expected. So, softer growth in the sector and sitting right on the dividing line between expansion and contraction, not a great look for a sector that carried the economy for the last couple years. Also concerning, the Prices Paid Index increased to 69.4 vs 68.0 expected and 69.2 in August. That will stir anxiety with the inflation-concerned group on the FOMC. Meanwhile, the Employment Index “improved” slightly to 47.2 vs. 46.8 expected and 46.5 in August. It still remains below the 50 dividing line and is the fourth straight month of contraction and fifth out of six months. The Business Activity Index dipped below 50 from 55.0 in August to 49.9. That is the lowest level since May 2020 and another indication of slowing momentum in the one sector that carried the economy for a couple years.

 

• Some of the respondent quotes in the report tell an ominous story as well. For example, “We are beginning to see the impact of the tariffs impact our business, particularly for food products from India, China, and Southeast Asia, coffee from South America, and apparel and electronics from Asia. Our year-over-year cost increases are getting progressively greater.” [Accommodation & Food Services]. “New residential construction continues to struggle in a tough market. Housing values remain high, and tariffs are beginning to be passed through on materials that are metal based. The pace of housing starts has been stagnant to slightly declining, as we head out of the summer building season.” [Construction]. “Pharmacy costs continue to rise, and medical devices are being held at bay mainly due to contracts and continued negotiations where we have two to three sources for a given product.” [Health Care & Social Assistance].

 

• Not surprisingly, only in the AI space did we find anything encouraging in the comments, “Demand for artificial intelligence (AI) and cloud infrastructure remains very strong. Our primary focus this month was on increasing production throughput to begin clearing the significant order backlog built up over the summer. While new order intake has stabilized at a high level, the overall business outlook remains positive. We are still facing significant supply chain challenges, especially for advanced semiconductors and power components, with lead times remaining extended. Price pressures are still present but have not worsened compared to the previous month.” No wonder that sector has carried the bulk of equity gains for much of this year.

 

• The week after the jobs report is typically a quiet period for reporting, and with government-issued reports embargoed until the shutdown ends, this week will be extra quiet, at least from an economic data perspective. As we mentioned last week, past experience says that if the shutdown is not resolved in less than a week (1 – 5 days) the risk greatly increases for the shutdown to last several weeks. Also, this shutdown doesn’t involve a possible credit event as is the case in a debt ceiling situation; thus, the potential to drag on is enhanced, not to mention the obvious wider divisions evident between both political parties at present.  

 

• We also mentioned last week that when you scan the latest labor reporting that we have seen, from ADP, to the Conference Board’s Labor Differential, to the JOLTS Job Openings to Jobless Rate, the Quits Rate and Hiring Rate that they all point to a loss in momentum.  You can add to that list the ISM Services PMI data mentioned above.

 

• The concerning part there is that if we lose the services sector, it bodes ill for the ability to stay out of a recession. Granted, all the indicators that are flashing yellow are barely yellow, meaning they could reverse and improve in any given month. We all recall the numerous so-called recession indicators that flashed recession for months on end with the economy continuing to truck along, so we’re cognizant of not getting too negative, but the data is starting to align in a softer growth look, if not outright contraction. As we’ve said before, a pick-up in layoffs, which is so far not evident would set off alarm bells in addition to the flashing yellows.

 

• Keep in mind too that with reduced immigration numbers, the current equilibrium rate to keep the unemployment rate steady is estimated at around 50 thousand new jobs per month. That’s a much lower bar than the low six-figure level when immigration (both legal and illegal) was much higher which stimulated labor force growth. We’ll offer the caveat, however, that with government possibly shedding jobs into the shutdown that the unemployed totals could begin to mount quickly in the months ahead.

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Futures Market Decidedly Expecting Two 25bps Rate Cuts by Year-End

Source: CME Group

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Not Much Good to Say in the Latest ISM Services Survey – Prices Higher, New Orders, and Employment Lower

 

 

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Prices Paid Still Elevated While New Orders Dip Lower