Contending With Higher Longer-Term Treasury Yields

The stock market will likely trade cautiously this week as it contends with higher longer-term Treasury yields even though a solid corporate earnings season begins.  There were several culprits for the rise in yields.  But, with the Democratic spending/tax bill expected to be pared down substantially (and assuming no gimmicks such as shortening the stated duration of spending programs) and the debt ceiling raised until December, the remaining culprits are /1/ fear of rising inflation, sparked in part by the further run-up in oil prices, and /2/ fear of a larger-than-expected amount of Fed tapering beginning in November.  This week's release of the September CPI could exacerbate the inflation issue, although  there are reasons why an adverse print may overstate the problem.  The FOMC Minutes should not worsen tapering fears.

The consensus estimate of +0.3% m/m for the September Total and Core CPI risks being too low -- which could trigger knee-jerk selling on the release.  Some components, such as Used Car Prices, are still susceptible to shortage-induced price hikes.  But, these will eventually unwind.  And, if the spikes are excluded, the Core will probably be benign -- which could reverse the knee-jerk selling.

The September Employment Report boosted inflation fears with the large 0.6% m/m jump in Average Hourly Earnings (AHE).   But, this jump overstated the underlying trend, as it was narrowly based.   A surge in the Education and Health Services sector (possibly related to the seasonal adjustment problem that depressed State Education payrolls) was responsible for pushing AHE above their recent 0.4% trend.  The remaining sectoral hourly earnings data were mixed between those that sped up and those that slowed down.  They were all in line with their recent trends.

The FOMC Minutes are likely to repeat the message Fed Chair Powell sent at his post-meeting news conference.  The Committee expects to begin tapering later this year and have it completed by the middle of 2022.  This timeline implies a $15 Bn reduction in Fed long-term asset purchases per month -- which has become the market expectation.  So, the Minutes could dampen fears of an even faster pace of tapering.  In addition, the Minutes should repeat the Fed's commitment to sustain strong economic growth, which is a powerful factor underpinning the stock market. 

A strong economy should help the stock market weather the rise in longer-term yields.  The September Employment Report confirmed the economy's strength, despite the sharp slowdown in Total Payrolls and the misleading news reports of a weak report.  /1/ Private Payrolls were stronger than Total, as the latter was depressed by a technically-related drop in State Education Workers.  Seasonals expected to offset a start-of-school-year jump in education jobs.  But, these jobs came in earlier than normal this summer, possibly because of the recovery from the pandemic.  So, seasonals overly boosted them then and overly depressed them in September.  /2/ The Unemployment Rate fell 0.4% pt to 4.8% almost entirely due to a jump in Civilian Employment -- not because of the dip in the Labor Participation Rate that news reports blamed.  The Rate would have been 4.9% if the Participation Rate were steady.  /3/ Total Hours Worked (THW) were strong, thanks in part to a rebound in the Workweek.  While the Atlanta Fed model estimate is a low 1.3% (q/q, saar) for Q321 Real GDP, THW point to the likelihood of a rebound in growth in Q421 -- particularly now that the Delta variant appears to be winding down.  The consensus estimate of +0.5% m/m for this week's September Ex Auto Retail Sales (2nd good-sized gain in a row) would support this likelihood.