Some JOLTS to the Market

Sometimes a single statistic acts like a blast of cold water in traders’ faces. After some early, bond-induced selling in pre-market futures, the “buy-the-dip” crowd began its reflexive hunt for bargains shortly after the US opened. Just as it seemed as though the major indices might claw back to yesterday’s closing levels (which themselves were puffed up by furious end of day buy programs), markets got a major jolt from economic news.

We are referring, of course, the August JOLTS Job Opening report that was released at 10 AM EDT.  It showed a significant, unexpected leap to 9.61 million, well above the 8.815 median estimate.  We also saw July revised higher by 93,000 to 8.92 million.  This pushes back against the notion that the labor market is easing.  It is hard to imagine wage pressures decreasing if there are increasing numbers of unfilled jobs. 

To put it mildly, stocks plunged.  The S&P 500 (SPX) and NASDAQ 100 (NDX) plunged from roughly -0.2% and -0.1% lower to over -1% down in just 15 minutes.  Yesterday’s love for the Magnificent Seven stocks, which was sufficient to keep indices afloat, has evaporated.  They are either leading the declines or falling commensurate with the rest of the market. 

Against the backdrop of continually rising interest rates – the 10-year US Treasury yield is up another 8 basis points to 4.76% (btw, the Canadian 10-year is up 22 bp after yesterday’s bank holiday) – and ahead of Friday’s employment report, it is clear that equity traders have gotten more skittish.  We see a renewed demand for volatility protection reflecting that nervousness.  The Cboe Volatility Index is flirting with, a level not seen since May:

VIX 6-Month Daily Bars

Source: Interactive Brokers

Perhaps more interestingly, we have started to see a small amount of backwardation in the VIX futures curve.  It is important to remember that backwardation implies a short-term scarcity in the commodity that is being traded.  In the case of VIX, that means that there is relative scarcity of volatility protection, at least between now and the end of the year:

VIX Futures Term Structure, Today (yellow, top), Yesterday (orange, top), 1-Week Ago (red, top); with Changes, Yesterday-Today (orange, bottom), 1-Week Ago (red, bottom)

Source: Interactive Brokers

Not only has the curve moved higher overall from November on, but we have a sharp rise in futures that expire from tomorrow morning through the monthly expiration on the 18^th of this month. It is notable because we have greatly diminished the levels of complacency that had caused us some angst over the past few weeks – as recently as six days ago.  That said, this hardly indicates the sort of levels that proceed major capitulation, which is why still stick with our comments from Friday:

Considering that the modest bounces in equities that occurred over the past couple of days hardly seem like a major bottom, I’m concerned that the rockiness can persist over the coming weeks.

Before events overtook us, I intended to write about another potential jolt to the economy: the resumption of student loan repayments.  Remember, loan repayments are unproductive spending.  Money that could have been used for goods, services or savings and investment – all of which have economic benefits – will now be redirected toward paying down loans.  This will be a harder topic to quantify, and I received some helpful guidance from my colleague Jose Torres, our senior economist, on the topic.  In his view, the resumption of student loan repayments “the pressure on spending will shave off at least 0.6% and up to 0.9% from real GDP through direct and indirect channels.”  That is unhelpful for those expecting a soft landing.  My concern for markets is that borrowers who have defrayed loan repayments might now need to sell investments to free up cash, adding a headwind to equities in general, and tech stocks and cryptocurrencies in particular.  I expect Jose and I to discuss this more in the near future.