Fed Leaves Investors Expecting The Worst -- What Is The Worst?

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Posted: Nov 01, 2018 11:06 AM
Fed Leaves Investors Expecting The Worst -- What Is The Worst?

It was a good session yesterday, but it could have been a great session if the Dow hadn’t shed 200 points into the close.   I think there was angst over the surge in 2Q 18 wages and salaries and how the Fed might react. The 3.1% increase is the fastest pace in a decade, and while it’s a shame to even think the Fed would want to derail the economy because Main Street is finally getting a raise, ambiguous language has left most guessing, and many expecting, the worst.

The worst would be aggressive rate hikes in a strong, but uneven economy. 

In October, the stock market has telegraphed as much to the Federal Reserve, just as it did back in February.  The housing market, peak auto and the stronger dollar’s impact on multinational companies are clearly warnings signs.  Maybe, Powell & Co will only focus on higher jobs and wages, but the second part of their mandate, inflation, is mooted.

With this in mind, let’s keep an eye on the 10-Year Treasury yield, which spurted back to 3.16%. 

Today, Amazon implements its $15.00 minimum wage, which is bound to put pressure on other retailers already under pressure from a smaller worker pool and record job openings that presents competition for talent of all skill levels.

Wage growth in the second quarter is already seeing outsized gains in retail and transportation & warehousing. 

All workers

3.1

Management, professional, and related

2.8

Management, business, and financial

2.7

Sales and office

3.7

Natural resources, construction, and maintenance

2.2

Construction, extraction, farming, fishing, and forestry occupations

2.3

Installation, maintenance, and repair

2.1

Production, transportation, and material moving

3.3

Excluding incentive paid occupations (1)

2.9

Transportation and material moving

3.7

Goods-producing industries

2.6

Sales and office

3.1

Natural resources, construction, and maintenance

2.6

Production, transportation, and material moving

2.5

Construction

3

Manufacturing

2.6

Service-providing industries (3)

3.1

Management, professional, and related

2.7

Sales and office

3.8

Production, transportation, and material moving

4

Service occupations

3.8

Trade, transportation, and utilities

3.5

Wholesale trade

3

Retail trade

3.6

Transportation and warehousing

4.3

Utilities

2.4

Information

3.1

Financial activities

3.2

Finance and insurance

3.4

Professional and business services

2.7

Education and health services

3.1

Educational services

2.5

Health care and social assistance

3.2

Hospitals

2.2

Leisure and hospitality

3.8

Accommodation and food service

3.8

 

Message of the Market

There continues to be a search for value, although less so in Consumer Staples where Kellogg (K) and Clorox (CLX) shares got hammered, and Church and Dwight (CHD) lowered guidance this morning.

The move into Materials and Industrials continued, and it looks like it will be more than a flash in the pan. I’m still concerned about Financials (JPM looks weak this morning), and I think Consumer Discretionary names will have a great holiday.           

Sector Performance

Oct 31

YTD 2018

S&P 500 Index

+1.09%

+0.34%

Communication Services (XLC)

+206%

+0.00%

Consumer Discretionary (XLY)

+1.29%

+5.42%

Consumer Staples (XLP)

-0.94%

-2.39%

Energy (XLE)

+0.61%

-7.63%

Financials (XLF)

+1.39%

-7.13%

Health Care (XLV)

+0.14

+7.14%

Industrials (XLI)

+0.76

-8.35%

Materials (XLB)

+1.37%

-14.26%

Real Estate (XLRE)

-1.35%

-1.24%

Technology (XLK)

+2.38%

+5.85%

Utilities (XLU)

-1.18%

+3.13%

 

Today’s Session

Bias has shifted to the upside, as most earnings results out this morning have beaten the street, including:

  • Cigna (CI)
  • Oshkosh (OSK)
  • Teva (TEVA)

Higher Labor Cost

The release on Productivity and Cost saw unit labor productivity climb +2.2% against consensus of a +2.0% increase.  The news took starch out of the pre-opening rally, getting back to the ever-present worry about the Federal Reserve.

Non-Farm

Productivity

Labor

Output

Hours worked

Hourly compensation

Real hourly

Compensation

Unit Labor Cost

Q/Q

2.2

4.1

1.8

3.5

1.4

1.2

Y/Y

1.3

3.7

2.4

2.8

0.1

1.5

Unit Labor Cost 

I continue to say the rally needs a strong American economy even if it brings risk of excessive Fed interference.