Geopolitics Wrestle with Jobs Data for Attention

Keith Lansford (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Keith Lansford, and here is Schwab's Early Look at the Markets for Monday, September 28th. The week begins with geopolitics, but might end with more focus on US data. A host of jobs, inflation, and industrial reports await, leading up to Friday's non-farm payrolls. At the same time, investors eye Middle East developments after signs of hope surfaced late last week, sending crude oil lower Friday along with Treasury yields. A media report Friday said talks between the US and Iran about reopening the strait were in a technical stage. Hopes have bloomed in the past, though June's Memorandum of Understanding quickly dissipated. Even if these talks don't pan out, more oil is flowing, helping send crude prices down about 8% last week. Oil exports from the Gulf neared 70% of pre-war daily levels, CNBC reported. Falling oil prices led to hopes that yields might slow their fierce pace. Yields hit fresh cycle highs Friday, but perhaps Wall Street is hoping that the velocity of the rate rise will slow, or potentially even reverse if progress is made in the Middle East, said Nathan Peterson, Director of Derivatives Research and Strategy at the Schwab Center for Financial Research. As the geopolitical mood improved, the broader market drifted higher following an extended stretch of narrow leadership. Small caps burdened by 19-year highs in the 10-year treasury yield emerged from hibernation. Many cyclical sectors that slumped earlier in the week showed life Friday as well. Robust US data helped spark the yield rally. It also arguably raised the profile of several key data points on this week's calendar, notably Wednesday's August Personal Consumption Expenditures or PCE Price Index, and Thursday's September ISM Manufacturing PMI. It's arguably back to a good-is-bad scenario, as each robust data point could send yields up while raising chances of a Fed rate hike next month. By the end of last week, odds of an October rate increase were 64 percent, according to the CME FedWatch tool. Tomorrow's job openings and labor turnover survey or JOLTS report and Friday's non-farm payrolls report also have rate implications. If the labor market remains stable, it just takes pressure away from that side of the mandate and allows the Fed to focus more on inflation and raise if necessary, said Colin Martin, head of fixed incomes research and strategy at the Schwab Center for Financial Research. Plenty of Fed speak marks the calendar, including four policy makers tomorrow. Talk from Fed speakers turned hawkish last week after the rate hike, though data ahead could help cement the central bank's decision a month from today. PCE on Wednesday isn't likely to offer surprises because the Consumer Price Index and Producer Price Index already came out and feed into PCE. However, the importance of PCE is unarguable, as it's the Fed's preferred inflation gauge. In checking inflation, it's important to keep more than the headlines in mind. While 2% is still the Fed's target, additional context could influence the Fed as well. This includes the share of components in PCE that rose 3% or more year over year, which gives insight into price breadth below the surface and is a metric Fed Chair Kevin Warsh cited at his press conference earlier this month. Turning back to jobs, analysts don't expect much change in the Joltz report from July's $7.27 million. That's relatively low compared with last spring's peaks. Keep in mind that Joltz lags a month behind most of the other jobs data this week. Thursday's Challenger Layoffs report for September could be more notable as it's a leading indicator.

Treasury yields finished mixed Friday but are up about 40 basis points for the 10-year note since the end of August, a dramatic gain. The rise has been relatively orderly and the term premium or the extra compensation investors demand for buying longer term debt hasn't moved too much. That suggests fiscal concerns which often drive term premium higher aren't necessarily the main factor. Instead, the rally appears driven by changing perspective about Fed policy which affects short-term rates. Robust US manufacturing and services data last week offered more evidence of US economic resilience despite high oil prices. It also helped send yields higher and likely means intense focus on Thursday's ISM manufacturing PMI. A surprisingly hot result could reinforce other recent robust manufacturing data giving yields another boost. Earnings were on pause most of last week but stir in coming days. The highlight is memory chip maker Micron after Wednesday's close. Micron shares soared last spring when it grew clear that the AI infrastructure buildout had vastly raised demand for chips. Today's earnings calendar isn't heavy but does include Jeffrey's financial group this morning. Nike reports Thursday and has been struggling. There's other corporate news this week too, notably on Friday when Tesla is expected to announce third quarter deliveries. Consensus is for between 454,000 and 461,000 down from a year ago.