One of my favorite reads into the health of the jobs market is a monthly tally of layoff announcements from outplacement firm Challenger, Gray and Christmas. I like it for the simple reason that it records employers’ intentions regarding staffing levels rather than just a simple accounting of who left their desk for good. Sure, that introduces a level of uncertainty in the numbers, too, because there’s no guarantee that companies will actually do what they say when it comes to the size of their workforce. But on the other hand, when an executive team goes through all the heartache of announcing cuts, they’re usually pretty serious about it. That gives it a forward-looking feel that’s harder to glean from other jobs data.

Let’s be clear: The Challenger data so far this year hasn’t been disastrous. In fact, Thursday’s report actually showed a slight deceleration in the pace of layoffs compared to last month — the 73,000 or so announced last month was around 4% below August’s total (even though it represented a significant increase on a year-over-year basis).¹ But neither of those two data points was even the most interesting thing in Thursday’s release. Instead, what caught my eye was Challenger’s characterization of the labor market as “at an inflection point now, where labor could stall or tighten. It will take a few months for the drop in rates to impact employer costs, as well as consumer savings accounts.”

That’s a wonderfully concise description of the conundrum facing the employers right now: The recent beginning of the Fed rate-cutting cycle has started the clock ticking on a race between cooling demand wrought by roughly two years of very aggressive Fed tightening on one hand, and the fundamental improvement in costs and liquidity promised by lower rates on the other. It’s no sure bet which side will win: In the past, the cooling effect has had the upper hand (which is why aggressive Fed tightening has so often led to recessions and the rising unemployment that comes with them). But this time, there is a valid case to be made that the other side — the one that leads to a softer landing for the U.S. economy — was given a head-start by massive injections of stimulus to combat the post-COVID blues (and perhaps by crafty maneuvering by the Fed itself) that could allow the U.S. economy to avoid much of that pain altogether.

I’m still not fully convinced, but for now, a whole lot of smart people seem to be betting on the latter, more unusual outcome — the one that favors a painless transition from tighter monetary policy to looser. But it’s still a close race: We know that because equity markets reacted to last week’s blowout payrolls number — which certainly made it feel like the labor market wanted to inflect higher — by putting in a moderate rally. Shorter-term treasuries sold off too, and the yield curve came close to re-inverting itself. Even more tellingly, rates traders pared back their bets that the Fed would slash rates by three-quarters of a percent (or even a full 1%) by New Year’s day and are now taking the Fed’s word that we’ll probably get another 0.50% worth of rate cuts this year and nothing more — sent down from on high via the latest update of the dot-plot – as gospel.

These things all suggest to me that markets were starting to believe the skeptics, but that Friday’s jobs blow-out (wherein the U.S. economy added a much-better-than-expected 254,000 jobs and the unemployment rate ticked down to 4.1%)² convinced them otherwise. It was only natural, then, they should bet big(ger) on stocks, slow their roll on the pace of rate cuts through year-end, and take a little money out of the short end of the curve.

So Friday’s data seemed to wash out some of the economic skepticism that had begun to worm its way back into markets. Again, I’m still not convinced by all this bullishness, but my suspicion that all is not necessarily as well with the economy as Friday’s data might suggest is starting to feel more stubborn than informed. Still, if the esteemed Mr. Challenger will allow me to co-opt his phrase, it’s worth taking a quick count of a few other things that might be standing at an inflection point, starting with oil.

Early last week U.S. officials warned that Iran was preparing to launch ballistic missiles against Israel in retaliation for attacks against Hezbollah, its proxy force in Lebanon. Sure enough, those attacks came on Tuesday, and although damage was reportedly minimal, Iran’s attack — and Israel’s pledge to respond — could represent a dangerous step-change in tensions in the region — especially if it leads to Israeli attacks against Iran’s oil infrastructure as some military tacticians have speculated. At the risk of repeating a refrain you’ve heard from us before, geopolitical risk rarely moves markets of its own accord. But when it exacerbates a vulnerability that already exists (like the risk that inflation might reignite in response to an oil price shock, for example), it can. That’s why a noticeable spike in oil prices — an inflection, if you will — is notable.

The economy is rife with other inflections (and budding inflections) as well: New order activity within the services sector showed signs of inflecting higher (a positive for the soft-landing crowd) but so, too, did inflationary pressures, which accelerated to their fastest pace so far this year and remain “well above pre-pandemic averages”³ (an obvious negative). Meanwhile, the manufacturing side of the economy seemed to generate new slack almost as fast as the services sector appeared willing and able to pick it up: New orders and output on that side of the tracks accelerated to the downside and employment fell faster than at any point since 2010 if you exclude COVID.⁴

And for good measure, unless you sit precisely at the partisan middle, you’re likely preparing for a big political inflection as well, because election day is only four weeks away. But let’s not go there – at least not yet. Instead, I’ll close with another reason to love the above-mentioned Challenger survey that extends beyond its extremely useful reminder of what it means to reach an inflection point: its focus on artificial intelligence (AI) as a growing source of job cuts. Challenger began tracking the number of AI-related job cuts back in May 2023, and the data are fascinating. So far, companies are willing to explicitly blame AI for only around 17,000 job cuts – almost all of them in IT. There is of course reason to suspect that HR executives responding to Challenger’s survey aren’t being entirely forthcoming when it comes to crediting AI with generating job cuts, but if the electric dreams (nightmares?) of AI are to come to fruition, that number will have to go a whole lot higher to justify all the capital being allocated to the space.

There are as many reasons to be optimistic about the advent of AI and its impact on jobs as there are reasons to be pessimistic, and the debate is only just getting started. In any case, it will almost certainly be quite some time before a disruption significant enough to move the needle on broad employment aggregates like unemployment rates and non-farm payrolls (mostly because nobody has yet unleashed a robot that can, say, write an interesting and fun-to-read Capital Market Perspective for example ...)

But it’s impossible to ignore the fact that AI has become the soup-of-the-day as far as capital markets are concerned, and you don’t have to look much further than Nvidia’s stock chart to understand that. But last week provided another — perhaps even more stark — reminder: A funding round for Sam Altman’s OpenAI (progenitor of ChatGPT) that pumped another $6.6 billion of fresh capital into the firm. If OpenAI were a publicly traded firm, that would imply a market value of nearly $157 billion — not bad for an organization that until recently was dogmatically nonprofit.

And therein lies the last inflection for today: No matter how timid the tangible impact on joblessness seems to be so far, AI represents a massive inflection point all its own: financially, economically, socially, and more. For better and worse, capital markets (and wage-earners) will have to adjust. Sam Altman’s net worth is just one small inflection point on that road.

What to watch this week

It’s (almost) earnings season again. Continuing a long-standing tradition, big banks will kick off earnings season on Friday, when JPMorgan, Wells Fargo, and Bank of New York will release third-quarter results. After a brief hiatus to celebrate a federal holiday on the following Monday, these big banks will be followed in short succession by another batch of big banks before the true torrent of third-quarter earnings releases begins later next week. 

As longtime readers will know, I place special emphasis on banks and what they say during their earnings calls for several reasons. First, bank executives to have great visibility into the economy at large and tend to be very open and frank with the investing public about what they’re seeing. That was on full display last month when a series of banks — including one scheduled to report results on Friday — offered up that trends might be softening for several segments of their business. While that alone might be sufficient reason to tune in, banks provide water to the modern economy in much the same way that a garden hose that delivers water to your tomatoes. If water is flowing freely, enjoy your salad. But if it gets kinked, you might have a problem. Watch Friday’s big bank results — and the Fed’s consumer credit release on Monday —for any signs of kink.

But banks aren’t the only companies releasing results this week: We also get a preview of what’s going on with the consumer on Thursday when Delta Airlines reports results. Travel-related demand seems to have slowed considerably after several quarters of post-COVID “revenge travel,” a point made repeatedly in last quarter’s results (and on post-earnings calls) by Delta and a number of its peers in and around the airline and travel business. That makes Delta’s release on Thursday potentially another good way to triangulate consumer demand and therefore broad, macroeconomic trends.

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Wow, did anyone else notice that we’re four paragraphs into this week’s “What to watch” section and we haven’t even mentioned inflation? And on a week when we get two separate releases — CPI on Thursday and PPI on Friday — to boot?! That’s because inflation seems to have lost much of its power to single-handedly drive market sentiment: Once the Fed lost interest and began focusing on the other side of its mandate (the one that requires it to keep the labor market growing), markets stopped caring quite as much, too. Make no mistake, there are still reasons to pay attention — most notably the nasty little anecdotes that keep creeping into things like PMI and ISM reports, where inflation seems uncomfortably close to reigniting — but unless CPI and PPI data make an obvious inflection higher, I wouldn’t expect either report to catch a whole lot of attention.

Meanwhile, Friday’s mid-month Consumer Sentiment report from the University of Michigan could be interesting simply because the UofM’s month-end read for September was zigged when its brother-in-arms, the Conference Board’s consumer confidence index, zagged. While all the usual caveats surrounding the wisdom of paying too much attention to consumer surveys in the run-up to an election apply, Friday’s release might help solve the riddle concerning which one was the better read: UofM’s notable increase in September, or the Conference Board’s similarly notable decline.

Similar caveats apply to relying too heavily on Tuesday’s Small Business Optimism index from the National Federation of Independent Businesses as election season approaches. However, small business still accounts for a majority of employment activity in the U.S., and small businesses have been more heavily burdened by restrictive Fed policy. Because this represents the NFIB’s first survey since the Fed began cutting rates, it will be very interesting to see if confidence has improved from the very depressed levels it has plumbed in recent months.