September Jobs Data Spur Rally:
NIKKO MARKET COMMENTS
Prepared by
The Nikko Securities Co. International, Inc.
Nothing's Right When The Economy's Too Tight
Boiling Over?
The Employment report for September does provide some breathing room for the Fed, but not much. The Fed is just hunkering down and worrying. Intense resource usage in the economy is still a matter of concern. Signs of tightness are becoming more widespread. UPS pilots still have not agreed to a contract, but are negotiating. The UPS strike has been followed by other action in the airline industry. Union penetration increased as a bloc of airline-related workers (passenger-service agents), not heretofore unionized at U.S. Airways, approved union representation. The agreement covers 10,000 workers. Workers at other airlines are said to be interested in this representation, too. Steelworkers were demonstrating outside a Iron and Steel Workers Exposition as they protested steel company actions they claimed were unfair tactics. But steel-makers are still under great pricing pressure in global markets as Nucor has just announced a 7% price cut for hot- rolled steel. Union Pacific, a railroad that has been under pressure on several fronts recently, has announced it has such a shortage of rolling stock that it plans to move some goods from the west coast eastward by ship, through the Panama canal. The railroad has freight that has been delayed as much as a month. Meanwhile, apart from some of the anecdotal stuff, some key pieces of macroeconomic data are spinning out tales of market pressures. The insured rate of unemployment is at 1.9% for three weeks running–unprecedented from 1970 onward. Money supply pressure is building as money growth has accelerated sharply across all aggregates in recent weeks. The U.S. economy is tight; the Fed is on guard; still, the bond market is in love!
Rolling Over?
Japan's Tankan (or was it tankin'?) survey pointed to a very weak economy there. That weakness has bolster the U.S. bond market, as bond yield lows of the century–for bonds of any currency–were posted in Japan. This led bond speculators to anticipate flows out of Japan and into the dollar market and other asset markets. The weak Japanese economy threatens stock values while the lowest yields of a century prm,ide for bonds the “big picture” sell- signal of the century. Yet, the Tankan report was weak. Ominously, the weakest responses came from smaller firars and from non-manufacturing firms. That means the larger Japanese manufacturers, who tend to be exporters, see the best future. This is exactly the thing that could bring Japan and the U.S. into a more intensified conflict. Seemingly, the more domestic a company's sales are, the more bleak its view of the future. And Japan has few–if any–policy levers left to pull, even as its closest key markets in Asia are under adjustment pressures as well.
September Jobs Data Spur Rally:
Yet The Economy Is On A Strong Growth Course
The table above shows precious little evidence of a slowing economy in Q3: that's the point. Inflation is still firm, albeit hovering at 3.5%. Private job growth is still solid. The Fed is still wary. The bond rally is still going, and is safe for a while, but not too long, as this economy is still strong.
Outlook For the Next Week Ended October 10th
Tuesday, consumer credit (August) is expected to rise by $7.5 billion. Wednesday, wholesale inventories (August) will likely be unchanged from July. Friday, producer prices (September) should rise by 0.2% in both overall and core measures.
Robert A. Brusca, Chief Economist
The Nikko Securities Co. International, Inc.
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