The first working week of the fourth quarter brings a mound of trepidation for the markets and global economy.
The third quarter ended on a sour note, with the U.S. market off nearly 25% for the year, as measured by the S&P 500. Globally, new British Prime Minister Liz Truss was forced into an embarrassing U-turn on her Reaganomics policy of tax cuts for the rich, while oil producing nations are considering a production cut to boost prices following the recent sharp sell-off on fears of a global economic slowdown.
In the U.S., questions are being asked about the Federal Reserve’s hawkish policy of raising interest rates to inflict “pain” on consumers and businesses alike as bond yields surge, stocks crater and the housing sector heads into a tailspin. A measure of inflation the Fed follows closely rose in August from July even as the Fed hiked interest rates by 75 basis points in three consecutive moves.
Then there is the devastating loss of life and property from Hurricane Ian, with the death toll at 87 already and estimates of damage topping $100 billion. President Joe Biden will visit Florida on Wednesday, but the storm also hit the Carolinas this weekend where four of the 87 died. He will also visit Puerto Rico on Monday.
And, to add insult to injury, there are real concerns about Russia as it suffers humiliating losses in its war against Ukraine and as President Vladimir Putin rattles the nuclear saber.
“The year of geopolitics is coming to a crescendo in the fourth quarter,” BCA Research warned Friday in its latest geopolitical survey.
Political Cartoons on the Economy
The investment firm focused on what it considers the overriding themes driving the global outlook: great power rivalry, hypo-globalization, and populism/nationalism.
These are playing out with “Russia’s proxy war with NATO, the Russia-EU economic divorce, the fourth Taiwan Strait crisis, and the looming crisis with Iran,” BCA says.
The end result is unstable markets and a rush to safe havens such as the U.S. dollar, now up 16% this year against the world’s other major currencies. A strong dollar wreaks havoc with corporate earnings for U.S. companies that have a large percentage of foreign sales while making it more expensive for economies outside the U.S. to export their goods and pay for commodities that are priced in dollars.
The dollar’s rise is a direct result of the Fed’s interest rate policies. Fed Chairman Jerome Powell has insisted he will continue raising rates until inflation is quelled and the “out of balance” labor market returns to a more normal state even at the expense of a recession.
So far, the higher rates the Fed has engineered have had a measurable effect in some quarters of the economy, crushing the inflated values in the stock market and leaving pending home sales 24% below where they were a year ago. But the labor market has yet to buckle.
This week brings a slew of readings on the current state of the jobs environment. Tuesday will bring a report on job openings for the end of August with expectations of a slight drop from July, but still 11 million open positions or about two for every potential worker. On Wednesday, private payroll firm ADP will issue its September survey of hiring, with 200,000 new jobs expected to be added after August’s 132,000 increase. On Thursday, there will be another weekly report on filings for unemployment benefits following last week’s 193,000, a number that hardly suggests a weak job market.
Then Friday comes the big number, the September jobs report from the Labor Department. Economists expect a number of around 250,000, but the reports have been surprisingly good of late and even the forecast number is one that would be considered good in normal times.
Economists at Wells Fargo’s corporate and investment banking group project a jobs number of 275,000.
“While still healthy, our call is well below the 438K YTD and nearly 800K post-pandemic averages as labor market gains are continuing to slow in response to tighter monetary policy,” they wrote Sunday. “That said, business surveys continue to point to a labor market that is still positive and running at a pace that is still above a sustainable run-rate given labor force growth and population trends. We look for the unemployment rate to hold steady at 3.7% and for average hourly earnings to continue at a similar pace to what we have seen so far this year – rising 0.4% m/m (5.1% yr/yr).”
That would still reflect a tight labor market and one “with wage pressures inconsistent with inflation coming back down to target,” the bank said.
Notably, Friday’s job number will be the last before the Fed’s November meeting of its monetary policy group where experts see another interest rate hike of magnitude.
Given developments overseas and the unpredictable nature of Russia’s Putin or China’s Xi Jinping, there’s nothing to suggest the beginning of the fourth quarter will bring anything but more frayed nerves on Wall and Main Streets.