All Things in Moderation

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are up small.

The employment market continues to weaken. Announced job cuts surged 175% on a YOY basis to 153,074. “October’s pace of job cutting was much higher than average for the month. Some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending, and rising costs drive belt-tightening and hiring freezes. Those laid off now are finding it harder to quickly secure new roles, which could further loosen the labor market,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

Warehousing and Tech saw the biggest number of cuts. “This is the highest total for October in over 20 years, and the highest total for a single month in the
fourth quarter since 2008. Like in 2003, a disruptive technology is changing the landscape,” said Challenger.

Bonds got crushed yesterday after a stronger-than-expected ISM Services Report. The services economy improved in October, driven by a big jump in New Orders and Business Activity. It wasn’t all great news however, with employment staying in contraction territory and prices jumping from 69.4 to 70 which was the highest reading in 3 years.

 “October’s Services PMI^® is a continuation of a downward trend of more than 10 percentage points in the 12-month average since February 2022, when it was 62.6 percent. The rebounds in both the Business Activity and New Orders indexes in October are positive signs, while the continued contraction in the Employment index shows a lack of confidence in the continued strength of the economy. The Backlog of Orders Index continued its 3½ year declining trend; even with a contracting Employment Index, companies can more than keep up with new orders to reduce backlogs. Respondents continued to mention the impact of tariffs on prices paid. There was no indication of widespread layoffs or reductions in force, but the federal government shutdown was mentioned several times as impacting business activity and generating concerns for future layoffs. In the Health Care & Social Assistance and Retail Trade industries, panelists noted seasonal strength in activity, and comments from many industries mentioned continuing demand stability.”

Homebuilders are seeing inventory build up and are offering incentives to move the merchandise. Some builders are offering mortgage rates as low as 4% and still houses are not moving. Unsold inventory is at the highest level since the summer of 2009.

D.R. Horton is offering a 3.99% mortgage, while Lennar is offering discounts of 14%. This is translating into lower margins and a slowdown in building new units. The glut of properties is most pronounced in Southern California and Washington DC.

The Supreme Court seemed skeptical that Trump’s massive use of tariffs without Congressional Approval is Constitutional. “You say tariffs are not taxes, but that’s exactly what they are,” Justice Sonia Sotomayor, one of the court’s liberal members, told Solicitor General D. John Sauer. “They’re generating money from American citizens, revenue,” Sotomayor said.

If the Supreme Court rejects the tariffs, then they would require Congressional Approval, which appears dicey since voters are generally downbeat on the economy.

Even with tariffs, inflation remains around 3%, which is above the Fed’s target but not astronomical. Shelter inflation is about to go from an inflationary pulse to a disinflationary one, and absent these tariffs, inflation might fall below the Fed’s target. If so, then the Fed needs to get to neutrality in a hurry, and might have stayed too late at the party.

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