Outside of the change from Summer to Fall last week, we are also hitting prime Hurricane season in the Southeast, and no I am not talking about the University of Miami. By the time you read this, a tropical low gathering storms between Cuba and South America, known only as Tropical Depression Nine at this time, will likely be a cat 1 hurricane. The importance here it that it is headed into the Gulf of Mexico and could significantly disrupt oil production. With the current supply levels, oil prices as well as gas prices should be going down. For some reason that has not been the case. Depending on the strength and duration of this depression’s growth, we might see even higher prices on the horizon.
So last week the market had a meltdown worse than a tired terrible two’s tot being told no they can not have another cookie. When you really take a look at the market information you have to wonder what is going on. Is Wall Street finally catching up with Main Street?
The Fed raised rates by 3/4 %, right on the market expectations. They also set the expectation of future rate increases, which from virtually all sources is also fully expected. From the prior week’s inflation number, it is clear that nothing on the horizon is signaling a major abatement of inflation. Based on the PPI, the CPI, and now watching oil prices climb, further action by the Fed is in the cards. There was nothing new here that everyone had not already seen.
On Tuesday the housing starts number was released. The number of new starts for August was beyond expectations, but underneath, was not that great. There was a non-repeatable reason for the strong starts. First, during the middle of the month, mortgage interest rates dropped, providing a temporary reprieve to some home buyers who jumped to lock in their rate. As long as the lock is long enough, the buyers should receive a very good rate on their long-term mortgage. Enjoy that aspect of the report, it is not going to recur. The other item in the report that was not well known was the high number of multifamily housing starts that were in the report. Apartment construction continues to rise to meet the rental demand. There is some concern that the saturation point in some markets is being reached. If the multifamily market over shoots, that would drive the housing construction industry down dramatically in 2023.
The Thursday job report produced a not so bad number of 213,000 new jobless claims. If you take out the pandemic years, this is right on the historical track for the prior 5 years. Essentially a good report that would otherwise indicate a strong economy. Continuing jobless claims fell which reflects the fact that many employers are still not at an employment level to meet the current demand in their business. In an economy that is considered in or nearing a recession, the job reports we are receiving are off base. Typically, a recession’s first indicator is job layoffs, lots of them. This of course is a very weird time. The lack of workers will make this recession very different, one where the employment levels will not be a reliable indicator, at least in the early stages.
The Kansas Fed report, which was a -9 in August, rose to 2 in September. Not a great report, but considered good.
The Baker Hughes total rig count rose by one this week. The distillate reports on gas, oil and fuel oil were all at or near parity in the market. An indication that energy supply levels are adequate and that prices should at least stabilize, in spite of lower demand.
Nothing this week was devastating information that should have sent the market into a tizzy, except that without horrible news, interest rates will be increasing for a while. So, the lack of bad news is, in itself, horrifying news to those in the market? To me, all the reports of the last month have strongly pointed to an extended period of stagflation. Sadly, until the underlying factors surrounding the high liquidity in the market, the labor issues and the supply chain issues are resolved, nothing is going to change.
Have a great week.