Market Snapshot 10.18.22- News Today Was Mixed

Good Tuesday AM,

Bonds are once again under pressure. The 10-yr is at 4.01 and it is possible we will retest the 4.11 level again. If we can hold that test, we could see a bit of relief rally, but it likely will not be anything worth getting excited about. Mortgage bonds are flat. The news today was mixed but leaned toward being unfriendly to bonds. Industrial Production 0.4 vs estimates of 0.1 and Capacity Utilization 80.3 vs 80.0. The NAHB (Builder Sentiment index) is tanking at 38 from an expectation of 43. Keep in mind, anything below 50 is contraction.

I still believe the lower-risk play is to stay locked.

Bloomberg shared an interesting piece with some deeper thoughts on the why’s of the economy. I don’t know that a business strategy can be to knowingly allow inefficiencies but for the moment, until the fear of not finding workers subsides, this is where we are. It is not sustainable.

Measuring how productive the economy is always seems like a fraught exercise, with numerous complicating factors. That being said, the measurements we do have are pretty dismal. US Labor Productivity in the first half of this year has registered some of the worst readings in history.

Everyone has various theories as to what’s going on. Maybe it’s just something weird in the data.

But here are two thoughts. One is that it seems possible that today’s workers are less productive for fundamental reasons. Perhaps because there’s been so much churn in the labor force over the last couple of years that a lot of workers are just relatively “unseasoned” or still getting used to their new jobs. And since most people don’t hit their stride at work for a while, perhaps that’s factor. Of course, this is hard to quantify.

Another popular belief is that firms are engaged in “labor hoarding.”

The NYT had a piece on this yesterday and the basic gist is that firms may be holding onto less-productive or less-profitable employees as a response to a period of brutal staffing shortfalls that were widely talked about throughout 2021. It makes sense. If you just experienced operational problems from having a difficult time hiring, then it stands to reason that you’d be slow to lay off workers.

In fact, I think that we’ve seen a general phenomenon of “stability hoarding”, whereby companies that were burned in 2021 in some way have been compensating for that experience by sacrificing some measure of efficiency.

This chart from Freightwaves (from the end of September) shows that we’ve seen a huge gap emerge between contract freight costs in trucking (green line) vs. spot rates (blue).

The gap is extremely large by historical standards, and it seems odd… if spot freight rates are falling off a cliff, why have contract prices been so (relatively) slow to adjust? As Craig Fuller wrote about in August, 2021 was a brutal year for shippers, with all kinds of supply chain and capacity challenges. There were numerous stories throughout that year of retailers unable to get their goods to stores, or off the ports or whatever. So it stands to reason if you were a shipper, and you have a working relationship with a carrier, you might be hesitant to rip that up and go for something cheaper after what you just experienced.

Of course, eventually the two lines will inevitably converge. But the point is, we can look to freight as a recent example of companies having been burned by the disruptions of 2021, and then possibly over-compensating for that by paying more for transportation than otherwise they might have needed to. And so it seems possible that in labor we’re seeing the same thing.

Please remain safe and stay healthy, make today great!