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Biggest Sell-off In Eight Months

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Another big drop hitting this morning’s pre-market indexes. following one of the biggest sell-offs in 8 months yesterday. Both the Dow and Nasdaq hived off more than 3% on Wednesday, while the Nasdaq fell 4%. Usually these types of performances are direct reactions to cataclysmic events that affect more than just the stock market, but not so this time.

Sure, we’re entering a new environment in terms of bond rates (solidly past 3% on the 10-year) and Fed funds rate (hitting 2% for the first time in a decade), but those didn’t just happen yesterday, they occurred last week. This was when we saw new employment numbers — both from the government and private-sector firm ADP — continuing their robust climb in both overall gains and wage growth, albeit tempered a bit due to affects from last month’s Hurricane Florence. But that’s when reality began to set in that our environment was different, and the era of “cheap money” was officially a thing of the past.

Clearly President Trump is none too appreciative about the Fed cranking up interest rates — nor of Fed Chair Jerome Powell’s hawkish rhetoric regarding them (a rookie mistake?) — but most analysts see current economic realities as deserving of higher rates, as they serve to absorb inflation from hitting the market too hard, too quickly. As it is, 3.2% on the 10-year bond shouldn’t make anyone quake in their boots; of course, what the market is projecting is an environment that leaves the 3-handles in the dust — and what then?

These are questions for, literally, another day, regardless how much market participants look to grapple with them this week. Look at this as a period of adjustment, as investors come to terms with present realities and come to understand the sky is not falling. In short: until further notice, consider current market activity essentially profit-taking.

New Consumer Price Index (CPI) numbers join their companion Producer Price Index (PPI) results from yesterday, and were lower than expectations, as the PPI was: Both +0.1% on headline and core came in beneath the +0.2% estimated for September, with no revisions to the previous reads. Year over year, these numbers look even worse: +2.3% on headline was 40 basis points under August and even lower than the +2.9% in July.

This is the lowest year-over-year headline read on CPI since February this year, when we saw a +2.2% read. Digging beneath the headline, Energy costs fell 0.5%, which basically makes up the difference between estimates and the actual figures. And with oil prices climbing again in the present month, we shouldn’t expect energy to drag down pricing when next month’s report comes out.

Also, 214K Initial Jobless Claims were reported for last week, up 7000 from an unrevised 207K the previous week. This is the second straight week of climbing initial claims after literally months of lower and lower headline numbers, consistent with our historically terrific labor market. There is nothing to fear in these figures, either — we already expected last month’s hurricane to take a bite out of near-term employment. These jobs should return eventually. The 4-week moving average is 209,500, squarely within the current range of 200K-225K.

Continuing Claims also rose, to 1.66 million last week, though these are still extremely low from an historic perspective.  This 1.66 million headline is also consistent with its 4-week average, which is the lowest we’ve seen since Three Dog Night (ask your parents), August 1973.




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