Morning Seeds

Tomorrow's News, Today.
Morning Seeds • 10/07/2022 - 9:20 AM EST

Jobs Day

Non-farm payrolls came in this morning at 263k against estimates of 255k. This represents a slower pace of job growth when compared with last month’s gains of 315k, as the Fed’s rate hikes begin to show signs of impact. The unemployment rate fell back to 3.5% and participation unexpectedly ticked down, though AHE were in line, ie wage growth is decelerating. From our perspective, the tonality coming out of the Fed suggests that they are not data dependent, and this job figure essentially does not matter - the FOMC is going to continue to aggressively raise interest rates, which flies in the face of any market narratives about a pivot. There are five Fed speakers today speaking and, in our view, there is no reason to believe that any of them will offer anything other than an echo of the previously hawkish sentiments.  

Sub-Surface Market Moves Suggest Regime Change

Despite weakness in the headline SPX, factor rotation underneath continues to show indications of risk-taking. Small caps outperformed large caps again while beta outperformed quality. We believe the move in cyclicals vs defense has been even more noteworthy. The trade has seen a 14+% gain over the last eight days. This marks the largest outperformance in an eight-day period over the last ten years. These factor patterns do not typically correlate with rising recession expectations, so regime change potential is high. Seasonally, we are entering a time in the market when money wants to find a place to work. Further, two-year yields are close to hitting the 20-day moving average, which could serve as a catalyst to further change.  

Fed-Fighters Beware

Equity markets ended the three-day streak of morning SPX lows and afternoon highs yesterday. Rather, the SPX highs were made in the first hour of trading and the lows hit in the last hour. Further, the two days of strength to start Q4 were met by a slew of Fed speakers continuing their inflation-first mantra despite a slowing economy and falling assets. This should serve to quell the growing narrative that central banks are nearing a turning point. We continue to adhere to the saying “do not fight to the Fed and do not fight the tape,” which both seem to be pointing in the same direction, even if positioning has started to square more with bearish sentiment.  

Semis Earnings Down, Jobs Up

AMD and Samsung both reported weaker earnings overnight, forecasting significant revenue shortfalls. These have been directionally anticipated, and semi's earnings in the coming weeks will answer questions around the depth of cyclicality with early answers unfavorable. Also relevant to markets, Semi's capex has become a major source of job support, specifically following reshoring trends and plant subsidies driven by the passage of the CHIPS Act. In New York State alone, Micron is putting $100 million dollars into Syracuse and IBM $20 Billion into Poughkeepsie (which Biden visited yesterday) for next-gen semi's manufacturing. The immediate-term jobs trends are clear, while the productivity (eg relative to Taiwan) and RoI potential can only be evaluated in the very long term.  

Putin Dissent?

US intelligence suggests that a member of Putin’s inner circle has voiced disagreement directly to the President about the war in Ukraine, which represents the latest sign of discord within the highest reaches of the Russian government. There also appears to be growing internal acknowledgement of battlefield setbacks for the Russian army stemming from mismanagement. This comes as President Biden is said to take his threats for the use of nuclear weapons quite seriously. From the perspective of markets, this does not point to some proximal de-escalation currently, in our view, as Ukraine has made it clear they will not negotiate with this regime and putting Putin in a corner likely bears at least tactical risk.