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There were two stories that mattered this week: interest rates and the jobs report for September. For the week as a whole, rate increases seem to have taken away from markets, as they tanked on an increase in the U.S. 10-year yield from about 4.6 percent to 4.8 percent. Clearly, higher rates meant a recession—and that’s bad for the market, right? But then this morning’s jobs report came in much stronger than expected, with 336,000 new jobs, about twice as many as anticipated. With prior months also being revised up substantially, clearly the economy is doing much better than we thought—even with the higher interest rates—and a recession is still some ways off.
That seems to have brought the financial markets back, with the S&P 500 rallying over 1 percent today. As I write this, it looks like it may close up on the week, ending a rollercoaster ride with a win, which is not what anyone expected this morning. So, what’s going on?
The Elusive Soft Landing
What we seem to be seeing here is a battle between the real economy and the financial economy. With rates going up, that would be expected to cause a recession, which could hurt corporate earnings. But with job growth strong and other data supportive, those higher rates seem to be bringing inflation down successfully without tanking the economy. This is the elusive soft landing that everyone has been hoping for, but which very few thought would really happen.
Of course, we are not there yet. Political turmoil in Washington continues to shake markets, the UAW strike is ongoing, and the rest of the world is a mess. There are lots of risks. At the same time, the fact that growth continues despite everything is a very positive sign.
A Solid Foundation
The real takeaway from this week, the first of October, is that a terrible September may be behind us. Despite everything, the real economy is in good shape. Markets are processing rising rates and are now showing signs that they can rally, even as rates move higher. A growing economy covers a multitude of sins. And if inflation keeps trending down (and we will find that out next week), then for all the doom and gloom, the foundation is still solid.
And that is not a bad way to end the week. Have a great weekend!
