It might have felt like nothing went well this week considering the headlines, but in actuality, the markets held up better than expected. We broke a four-week downward trend with all but the Dow Jones Industrial Average finishing slightly higher. The reason I may sound surprised is that the jobs report released today highlights continued issues in the labor market and a persistent unease that higher interest rates are on the horizon.
The big surprise this week was found in the nonfarm payrolls report which was expected to come in at 160,000 but instead blew past estimates at 336,000. Additionally, the U.S. Department of Labor revised August higher from 187,000 to 227,000. Today’s report firmly puts the risk of another rate hike back on the table and means higher for even longer monetary policy, which will continue to put pressure on stocks. Just last week almost no one believed the Federal Reserve was poised to raise rates again. But the probability for a 0.25% interest rate hike is now sitting at 28% and trending higher. The next FOMC meeting is November 1, at which time it will decide on whether to raise rates again or to hold steady. In a nutshell, the labor market is not going to cool with job growth continuing at this rapid pace. This will keep upward pressure on wages, making it more likely that the Fed has further to go in raising interest rates.
Labor market tightness isn’t the only headwind. While the House of Representatives averted a government shutdown last week, it didn’t solve the issue. In fact, removing the Speaker of the House, Kevin McCarthy could pose additional issues as an appropriation bill will take a back seat to the process of electing a new Speaker of the House. The deadline is now November 17, which seems like plenty of time, but will come faster than we’d like. Additionally, higher interest rates have put a huge dent in homebuying. We learned this week that mortgage applications have dropped to the lowest level since 1996, while mortgage rates have risen to the highest level in a generation. And finally, student loan payments resumed as of last Sunday. After a three-year pause, interest began accruing on loans last month, and payments came due starting Sunday. While this won’t immediately impact the economic data, it will likely slow consumer spending in the months ahead.
On the corporate front, there was a lot of news this week. I’ll highlight it in some bullet points below:
- McDonald’s & Wendy’s won a lawsuit I reported on just one month ago. A U.S. District Judge dismissed a lawsuit accusing McDonald’s and Wendy’s of misleading customers in advertising about the size of their hamburgers. The judge ruled that there wasn’t any evidence that the plaintiff had even seen ads for the burgers that were the basis of the lawsuit. Chalk one up for fast food.
- After ending a month-long strike by the Writer’s Guild, Netflix is reportedly looking to raise its prices (again) once it resolves issues with the Screen Actors Guild. With inflation taking a toll on consumers, it will be interesting to see just how far the company can expand pricing before losing customers.
- Walmart announced it is concerned over the increasing use of weight-loss drugs such as Ozempic. According to management, the use of this class of drugs is starting to have an impact on shopper behavior. The head of U.S. Operations, John Furner, said there is a pullback in overall basket in terms of items purchases and calories in them. That’s right they know how many calories you are consuming by the items in your cart. I guess I shouldn’t be surprised, but as usual, I am.
- Clorox, hit by a hacker group in August, is now reporting the financial impact of this cybersecurity attack. Management lowered earnings to -$0.75 to -$0.35 versus consensus of $1.09 to $1.36. Additionally, sales are now expected to decrease 23%-28% versus previous guidance of mid-single-digit growth. Something tells me there’s more going on here than just a cyber-attack.
In closing, I came across a bit of fashion news that might interest you. I haven’t given much thought to the spacesuits NASA astronauts wear, considering they are designed for a specific function. After all, white or orange doesn’t make much of a difference if it isn’t airtight. Well, it seems the famous Italian luxury brand Prada will be working on the spacesuits for 2025’s Artemis III mission to the moon. “Prada’s technical expertise with raw materials, manufacturing techniques, and innovative design concepts will bring advanced technologies… yada yada yada.” Apparently, the company’s “cutting-edge” work in fashion design was among the many reasons the company was chosen. I’ll bet the suits look fabulous, let’s just hope they don’t fall apart the first time they are washed. Now you know.Bruce J. Mason, MBA