The market opened for a significant gain today before economic uncertainty dragged equities lower. Apple (NASDAQ: AAPL) led the way down (-1.8%) as all three major indices remained on track to close out the holiday-shortened week for a loss.
Covid cases and a Thursday taper warning from the European Central Bank (ECB) weighed heavily on investors. But so too did inflation, which jolted higher again last month according to the August Producer Price Index (PPI).
Revealed this morning, headline PPI rose 0.7% month-over-month (MoM), surpassing the +0.6% consensus estimate. Core PPI (which excludes food, energy, and trade services), on the other hand, increased by just 0.3% MoM, well below the estimate of +0.5%.
This discrepancy was caused by major price gains in both trade services (margins for retailers) and logistics (transportation, warehousing). Trade services jumped 1.5% MoM while logistics surged 2.8% MoM.
The net effect of the hotter-than-expected PPI print was a continued slimming of corporate margins.
Margins for US corporations are now down by 2.4% year-over-year (YoY). This decline will either be absorbed by consumers via price increases or by corporations that decide to eat the costs instead of passing them on to consumers. The latter would ultimately trim share prices.
The former would cause CPI to spike. We’ll find out soon enough what most corporations decided to do when the August CPI is released next week. Investors have mostly been able to sidestep inflation this year. Eventually, however, persistent CPI increases should impact sentiment once the Fed attempts to limit prices through rate hikes and tapering – two things that could instantly wreck the long-term bull market.
What also could bring stocks lower is a blockbuster September jobs report, due out October 8th. Most unemployment benefits expired on Monday and as a result, some analysts expected a “hiring blitz” to take place over the next few weeks. A major jobs “beat” in September might be enough for the Fed to start tapering, especially if next week’s CPI reading overshoots the consensus estimate.
But that all changed following President Biden’s vaccine mandate from Thursday evening. Companies with more than 100 employees will be tasked with enforcing vaccine compliance. Any worker that remains unvaccinated past a certain date (yet to be determined) will cost these companies $14,000 per violation.
If the vaccine deadline lands somewhere in September, the odds of a strong jobs report will drop to near-zero. The July JOLTS report (released Thursday) showed that employees are voluntarily leaving their jobs at an unprecedented rate (3.1%). The number of quits and terminations is about to skyrocket in response to Biden’s new mandate.
This should effectively kill the post-Covid US labor recovery. What’s more, the already dire labor shortage could get a whole lot worse. The silver lining here is that small businesses that employ less than 50 workers could enjoy a hiring renaissance, as they’re not subject to the vaccine mandate.
It may only be a matter of time, though, until Biden targets these companies as well.
Overall, the new vaccine mandate could very well cause unemployment to rise. Fed Chairman Jerome Powell said that the Fed wouldn’t taper until the US got back to “full employment,” or an unemployment rate of 3.5%. The August jobs report showed that unemployment dropped to 5.2% last month
But in September and October, the unemployment rate could potentially tick higher as America is split into two camps: those who took the Covid vaccine and those who didn’t.
That may be evidence enough for Powell & Co. to delay the taper, which should make bulls happy.
Even if it ends up wounding the US economy’s longer-term potential as surging inflation rattles consumer confidence.