The market has over-reacted to the Fed’s worries about the labor market

Outlook

Bottom line, the market has over-reacted to the Fed’s worries about the labor market and as we have noted in recent weeks, a lot of the headline data can be mitigated if not outright refuted. But once the market has a grip on a topic, it’s hard to make it let go. We have to expect pessimism about the soft landing getting suddenly hard.

The other big factor is oil, and this is under-appreciated. The small rise yesterday still leaves the price of oil down about 20% y/y, and not getting much press until today is the Saudi fear of oil at $50. The WSJ cites a Saudi warning of $50 if OPEC doesn’t stick to targets. Considering OPEC members famously cheat on their quotas, this is a little sad. OPEC meets today but is reported to plan to raise output at the Dec meeting.

Then there’s Japan. The incoming new government apparently intends to take a hard line on monetary policy, even as the BoJ is independent and doesn’t have to heed political rhetoric. But that’s not the Japanese way, which is to seek compromise at all times and avert conflict. Now we have the BoJ chief Ueda hinting uncertainty in the global economy may deter it from hiking rates, at least in the near-term. This was nice for the dollar but may have aroused some hidden ire in political circles. Is there a battle looming? Not that we in the West can see, but if the PM wants higher rates and the BoJ is reluctant, it’s at least a skirmish. So far we’d put our money on Ueda and the yen getting ever softer—again. But not much money.

Tidbit: The dockworkers strike is not really about wages. It’s about losing jobs to automation. Apparently ports in China are almost fully automated. Gee, and they have such a labor shortage.

According to the Washington Post, it’s true you can run an entire port with hardly any humans. https://www.washingtonpost.com/opinions/2024/10/01/dock-worker-strike-jobs-pay-automation/

“In this country, three terminals (in Los Angeles and Long Beach) are considered fully automated. Another three (one in New Jersey/New York and two in Virginia) are classified as semi-automated, meaning that machines do some of the sorting. A 2022 study by the Economic Roundtable of Los Angeles found that 572 jobs a year were lost (about 5 percent of the workforce) after automation in California. The study was funded by the West Coast dockworkers union.”

“Rotterdam was the first major port to automate and is often held up as the global ideal. But its enhancements also came with generous early-retirement packages for workers. A similar compromise might be possible in the U.S. strike now.” Oh, dear. Dream on.

Forecast

Sentiment is turning a bit wonky on the number of risks suddenly multiplying—Middle East war, dockworkers’ strike, far right election wins all over the place, the US election. Rising risk aversion led to aise in the oil and a dip in equities, as well as favoring the dollar. It’s not clear whether this turns into a bigger move.

Sentiment can turn on a dime. Iran has already said its attack on Israel is over. The strike can get resolved. There’s nothing to be done about the US election until it’s over, but it’s not clear that this is having much effect on its own, anyway. 

Political Tidbit: The debate between VP candidates last evening was tiresome. JP Vance lied and lied some more (e.g., Trump “protected” Obamacare). The biggie was his refusal to answer the question of whether Trump lost the 2020 election and whether he would violate the Constitution by taking the electoral vote to the state legislatures, as he has said.

For TV pundits, this was fatal but it’s not clear the voters got it. Demo VP candidate Walz was okay but didn’t nail Vance to the floor like Harris did to Trump. An instant poll minutes after the debate ended by CBS had Vance ahead by 1 point. In the bigger picture,  comparing Vance to VP candidates going back ten years, Vance has a negative rating second only to Dan Quayle, who was thick as two bricks and even the pretty thick public could see it. (Can you spell potato?)

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