Main U.S. indexes in negative territory
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Utilities weakest S&P 500 sector; energy gains
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Dollar, crude rise; gold, bitcoin down
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U.S. 10-Year Treasury yield rises to ~3.80%
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FRIDAY'S JOBS REPORT: HOW WEAKNESS IS THE NEW STRENGTH (1245 EDT/1645 GMT)
It's a familiar ritual on the first Friday of every month - investors and analysts watch the clock tick down to 0830 Eastern time, poised to pounce on the headline and comb through the details of the Labor Department's monthly employment report.
Economists polled by Reuters expect the U.S. economy to have added 250,000 nonfarm jobs last month, a 20.6% drop from August but hardly a number associated with a labor market softness.
Consensus has the unemployment rate stubbornly holding firm at 3.7%.
The markets dislike surprises, so any wide miss - whether to the upside or downside - is likely to crimp investor risk appetite.
But in the new normal of hot inflation, rising interest rates and tightening monetary policy, a modest downside payrolls surprise, or a small uptick in the unemployment rate could send a signal that Powell & Co's relentless string of increases to the Fed funds target rate is beginning to move the mountain, which could, in turn, provide the central bank room to pivot.
"A mild disappointment in the data would be perfect," says Oliver Pursche, senior vice president at Wealthspire Advisors, in New York.
The sweet spot would be, "A report that demonstrates that the Fed tightening is working but not to the point where people are going to think we’re going to enter a recession imminently," Pursche adds.
Beneath the headline numbers, market watchers will be paying close attention wage growth, which - along with other indicators - has been cruising well above the central bank's average annual inflation target.
Analysts predict average hourly earnings will post a 5.1% year-on-year growth rate, a minimal but welcome cool-down from August's 5.2% print.
If that number fails to budge - or worse, if it grows hotter - it could send financial markets scrambling to up their terminal Fed funds target rate estimates.
Any drop on the jobless rate - which would be good news in normal times - could have the same effect.
But a slew of recent indicators hint at a loosening in labor market conditions.
Job openings are falling, unemployment claims are rising, and planned layoffs surged 46.4% last month.
So even if unemployment holds steady, there's a growing probability that it will soon begin to creep up.
"As the unemployment rate ticks higher, wage growth will likely slow, taming some of the inflationary pressure in the US economy," writes Bill Adams, chief economist at Comerica Bank.
Meanwhile, place your bets and cross your fingers.
STOCKS VS BONDS: WHICH HORSE TO MOUNT? (1237 EDT/1637 GMT)
Which will rally first – U.S. large-cap stocks, or long-term Treasuries?
Nicholas Colas, co-founder of DataTrek Research, notes "they have been moving in tandem all year, and not in a good way." The S&P 500 is down around 21% yeat-to-date, while the widely held iShares 20+ Year Treasury Bond ETF is down 31%.
Colas says that stock-bond correlations are usually lower than they've been in 2022. In fact, they are usually negative.
Therefore, Colas thinks stocks and bonds will likely soon decouple, and by enough that one should work measurably better than the other.
As Colas sees it, each asset class has arguments in its favor:
STOCKS: Colas says they can outperform because third-quarter earnings season will be good enough to beat reduced Wall Street analysts’ expectations and long-dated Treasuries face headwinds from rising real yields as the Fed sells down its bond portfolio.
BONDS: The case for bond outperformance is built around the view that we will get enough data to confirm that the U.S. economy is slowing and, while Q3 earnings season may be “good enough”, analysts will still be slashing their numbers over the rest of the quarter.
Colas also offers a third, "profoundly unpleasant," possibility: stock – bond correlations remain high through Q4 because neither has any fundamental justification to rally from here. However, he believes that would be "highly unusual."
As for the both stocks and bonds rallying from here, Colas also says that could happen. That would, of course, keep correlations quite high. Still, in this scenario he thinks it would likely be the 20+ year Treasury that outperforms given its duration is so much longer than that of stocks.
The best-case longer run scenario for both asset classes in Colas' mind is if bonds outperform stocks in the fourth quarter.
"That would mean rates are somewhere near a cycle high right now. This would leave stock valuations better positioned if Wall Street earnings estimates need further downward revisions."
SEMIS OUTPERFORM AS WALL STREET'S RECENT RALLY FADES (1205 EDT/1605 GMT)
Chip stocks bouncing between small gains and losses on Thursday but outperforming the rest of Wall Street as Advanced Micro Devices and Nvidia build on their recent rebounds.
The Philadelphia Semiconductor index is down 0.1% around mid-day, better than the S&P 500's 0.7% drop and the Nasdaq's 0.4% dip.
While much of Wall Street has hit the brakes after a monster rally on Monday and Tuesday, Nvidia has continued to climb, albeit with a modest 0.4% rise on Thursday. The graphics chipmaker has now ascended almost 10% since Sept. 30, when it closed at its lowest level since March 2021.
Rival Advanced Micro Devices is rising almost 1% on Thursday, and is now up about 9% since Sept. 30, when it closed at its lowest level since July 2020.
Investors continue to worry that the global chip industry is heading for its first revenue downturn since 2019, but sentiment has been bolstered a little by a recent dip in Treasury yields. Valuations of high-growth companies, such as many chipmakers, tend to be hurt by high interest rates.
Following the recent rebound in battered chip stocks, the SOX remains down 36% year-to-date. If the index were to end 2022 at its current level, it would be its worst year since the 2008 financial crisis.
BANKS ARE RESILIENT BUT... (1101 EDT/1501 GMT)
A week ahead of a busy start to the third-quarter bank earnings season, Credit Suisse analyst Susan Roth Katzke is focused on "fundamental resilience" in her preview research.
While Katzke sees Q3 bank earnings per share running 11% below year-ago numbers, she expects pre-provision net revenue (PPNR) 2% above year-ago levels and up 5% sequentially.
The biggest support for the sequential increase is the lift in interest rates along with healthy loan growth and loss rates, according to Katzke. But she notes that investors will already be expecting weaker market revenue, other than trading, and weakness in mortgage banking.
But as always investors will be heavily focused on guidance on net interest revenue momentum, loss rate expectations and loan loss reserve adequacy due the heightened recession risk.
"We enter earnings season confident in the strength of banking fundamentals, but cautious vis a vis the direction of estimate revisions," wrote Katzke suggesting that there is limited upside due to macro and market-related estimate risk.
The analyst's outlook for stocks highlighted broader uncertainty as she sees "~20% total return potential on average across the Large Cap Banks realizable with greater confidence in the manageability of macro slowing," but also sees the potential for "~20% downside to more fully discount a mild recession."
This said, Katzke's highest conviction recommendations, each with ~30% total return potential are: Goldman Sachs, Wells Fargo, Bank of America and JPmorgan Chase .
Meanwhile, banks are taking a backseat on Thursday. The S&P 500 banks index is off around 0.9% vs a 0.25% decline for the overall S&P 500 index.
THE UNEMPLOYMENT LINE IS GROWING - WOO-HOO! (1032 EDT/1432 GMT)
U.S. labor demand is showing early signs of softness as a months-long barrage of interest rate hikes from Powell & Co are beginning to make themselves felt.
So, in this topsy-turvy upside-down world of hot inflation, a hawkish Fed and recession jitters, bad news can be good: tightening monetary policy appears to be working, a prospect which could afford the central bank to pivot back to a less aggressive stance, perhaps sooner than anticipated.
The number of U.S. workers filing first-time applications for unemployment benefits surged by 15.3% last week to 219,000, landing 16,000 north of consensus, according to the Labor Department.
A combination of low participation and a record number of job openings has resulted in an extremely tight labor market and has put upward pressure on wage growth, which has stoked market participant fears that decades-high inflation could be the exact opposite of 'transitory,' which was a favorite Fed adjective until it wasn't.
The central bank fired the opening rate hike salvo six months ago, when jobless claims touched their lowest level in generations. Last week's print is a considerable 31.9% higher than the March nadir of 166,000 claims.
Even so, the Fed hike tantrum isn't likely to subside any time soon.
"Any easing of labor market conditions will be welcome by the Fed but won't change the FOMC's plans to continue to raise rates in an effort to bring down inflation," writes Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "The labor market should still be characterized as tight, with the ratio of job openings to unemployed workers still elevated in August despite a small decline."
Ongoing claims, reported on a one-week lag, inched 1.1% higher to 1.361 million
Separately, the stack of pink slips promised by U.S. firms grew 46.4% taller in September, surging to 29,989 total job cuts.
Executive outplacement firm Challenger, Gray & Christmas' (CGC) planned layoffs report also shows a 67.6% increase from September of last year.
"Some cracks are beginning to appear in the labor market," writes Andrew Challenger, senior vice president at CGC. "Hiring is slowing and downsizing events are beginning to occur."
Still, labor market tightness lingers. The 209,495 job cuts announced year-to-date are 21% below the same time last year. That ship is only just starting to change course.
"We expect layoffs to rise gradually over coming months in response to Fed tightening, which will weigh on demand," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But for now, having faced persistent labor shortages, businesses are still holding on to rather than letting go of workers."
So far this year, automotive, healthcare and technology sectors have been hardest hit.
Investors now look to the Labor Department's always-hotly-anticipated employment report due Friday morning, which is expected so show payroll growth of 250,000 in September, with the jobless rate holding steady at a low 3.7%.
As shown in the graphic below, Fed rate hikes amid low unemployment and spiking inflation are often prelude to recession:
Wall Street is now heading lower on Wednesday, ceding territory won in robust rallies earlier in the week.
An uptick in benchmark Treasury yields have put bond proxies on the run, with utilities and real estate falling hardest.
The FAANG gang are once again weighing heaviest.
U.S. STOCKS ARE MIXED AND MODEST IN EARLY TRADE (0955 EDT/1355 GMT)
The main U.S. stock indexes are mixed early on Thursday, though changes are relatively modest, after data showing an increase in weekly jobless claims suggested the Federal Reserve may need to ease its aggressive monetary tightening cycle.
With this, however, the U.S. dollar is stronger, while the U.S. 10-Year Treasury yield is rising back up over 3.80%.
S&P 500 sectors are mixed with energy out front of the gainers. Defensive bond-proxies are on the weaker side.
Chips are outperforming with a gain of more than 1%, and growth is on track to outperform value for a third-straight session.
Meanwhile, the S&P 500, at just over 3,765, still faces resistance in the 3,810.32/3,815.20 area. Wednesday's high was at 3,806.91 before the benchmark index then backed away. Support is at Wednesday's low of 3,722.66 and then 3,712.
Here is a snapshot of where markets stood around 20 minutes into the trading day:
BITCOIN: RUMBLE, STUMBLE, OR CONTINUE TO BUMBLE? (0900 EDT/1300 GMT)
Since collapsing into its June lows, bitcoin has essentially been range trading, making no progress for more than three months.
However, given what are now especially compressed daily historical volatility readings, and strong positive correlations with U.S. equity indexes, a bitcoin breakout may coincide with either a surprising risk-on charge, or another market panic:
Since bottoming on June 18, one trading day after the S&P 500's intraday low, and down 72% from its Nov. 8, 2021 record close, bitcoin has struggled to make progress. Its summer rally stalled with its August-15 intraday high, one day prior to the intraday highs in the main equity indexes. Both bitcoin, and stocks, were then whacked.
However, bitcoin bottomed on Sept. 21, or nine trading days ahead the stock indexes' Sept. 30 troughs.
Meanwhile, on Oct. 3, bitcoin's daily Bollinger Band (BB) width fell to 0.087. Of note, over the past several years or so, major bitcoin moves have come in the wake of sub-0.2 daily BB width readings. Low BB width does not in itself predict direction, but it can indicate a market especially ripe for much more spirited action, or its next significant trend.
The recent BB width low was its tightest since October 10, 2020. In the wake of the Oct. 9, 2020 BB width trough, bitcoin enjoyed an upside breakout leading to a massive bull-run.
Bitcoin, now around $20,200, could continue to range trade, however, given especially compressed daily historical volatility, traders are on alert for a next big move.
A forthright thrust, and close, above the upper daily BB, now just over $20,400, will have potential to spark a sharp band-width rise, and an upside breakout.
A close below the 20-day moving average, now around $19,400, can flip pressure back toward a downside range break.
Violating the lower daily BB, now around $18,400, can also spark a sharp band-width rise, and lead to a slide to new lows.
Of note, bitcoin's Nov. 8 record close coincided with the record close in the small-cap Russell 2000, and came just nine trading days ahead of the Nasdaq Composite's Nov. 19 record finish.
Bitcoin's rolling 50-day correlations with the RUT, and IXIC, now stand at a robust 0.77 (+1.00 is a perfect positive correlation). Thus, if bitcoin resolves its range, one way or the other, U.S. equity indexes will likely be coming along for the ride.
FOR THURSDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: