U.K. U-Turn

HIGHLIGHTS:

• A U-turn in UK tax policy helped the relief rally in stocks investors saw earlier this week.
• US stocks rallied 5.7 percent on Monday and Tuesday on the UK tax reversal, but also as investors speculated the Fed may be near its peak rate.
• Employment data remains mixed as a JOLTS Survey showed a decline in open positions, while ADP's jobs report indicated more jobs were added last month.
• The market remains in a "bad news is good news" cycle as the Fed monitors economic data and attempts to cool the economy.

Backing off is hard to do, at least politically. The ramifications of relenting in the face of pressure can be even more difficult when it is one of the first major moves a new leader makes. Yet, that is precisely where new UK Prime Minister Liz Truss found herself last week, after announcing a tax cut for top earners, by proposing the elimination of their top tax tier. The idea was an attempt to stimulate economic growth in the face of a slowing economy across the pond. Locked in a tense stare-down with capital markets, the British pound fell to nearly 40-year lows versus the US dollar and a global stock market sell-off. Truss blinked. On Monday, she announced her government had scrapped plans for this tax cut. The result was a whipsaw in foreign exchange markets and a bounce back in share prices. The prospect of an already debt-laden UK government avoiding additional liabilities provided some much needed relief.

There is no doubt that this has been a difficult time for investors. There have been few points in history where market participants have had to deal with such a plethora of concerning factors including surging inflation and higher rates, recession talk and other economic troubles, spikes in foreign exchange rates, and unpredictable financial markets. However, with all these topics being thrown around, it's easy for the larger picture to get lost in the minutiae. Keep in mind, economists are projecting that US GDP growth will remain positive in the second half of 2022, with the economy growing by 1.6 percent for the year, according to Bloomberg.

As if on cue, Tuesday morning, the Bureau of Labor Statistics announced a significant drop in the number of jobs American employers are offering in their Job Openings and Labor Turnover "JOLTS" Survey. Job openings came in at 10.05 million, a 10 percent drop from the previous month. In the cycle we are in, where bad news is good news—and vice versa—the lower number of job openings added wind to the sails of October's impressive start to the markets. A softening labor market is one of the key issues investors have been looking for that could portend the Fed packing its fire hose of interest rate hikes intended to cool the economy.

What a difference a day makes. After the about-face in Westminster, markets rallied strong across the board. In the two days after that announcement, the S&P 500 rallied 5.7 percent, the 10-year US Treasury dropped 21 basis points in yield, and the British pound appreciated 6.5 percent against the greenback.

Markets now turn to the September jobs report, due for release this Friday. The average estimate is that the economy added 260,000 more jobs during the month. As always, we get a sneak peek two days prior with the ADP private sector jobs report released today. American businesses added 208,000 jobs during the month, which was slightly higher than the 200,000 forecasted. Additionally, the report showed a 7.8 percent increase in wages over the previous year. The conflicting data from the JOLTS survey showing potential cooling on the horizon, as compared to what we are seeing from the ADP data of a resilient job market, only serves to fuel market volatility in the interim. Until a sustained trend of cooler jobs data and wage growth establishes itself, we can expect these large swings in markets to continue.

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