TRADING DAY-Tech momentum accelerates as Fed looms

By Jamie McGeever

ORLANDO, Florida, Sept 15 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. and world stocks roared to new highs on Monday, and the dollar and Treasury yields slipped as investors maintained an aggressively "risk on" stance in anticipation of an interest rate cut from the Federal Reserve later this week.

More on that below. In my column today I look at the U.S. housing and labor markets, and how the simultaneous declines in both threaten to feed off each other and create a powerful headwind for the economy.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Trump's push to overhaul Fed casts long shadow over policy meeting

2. Fed Governor Cook declared her Atlanta property as "vacation home," documents show

3. China's economy slumps in August, casts doubt on growth target

4. Bank of England to scale back QT, keep rates steady

5. We set out to craft a phishing scam. AI chatbots were happy to help
   
   
   

Today's Key Market Moves

• STOCKS: Record highs for S&P 500, Nasdaq, Nikkei, and MSCI All Country, fresh 4-year peak for MSCI Asia ex-Japan. Global stocks up nine days in a row for the fourth time this year.

• SHARES/SECTORS: Alphabet up 4.5% and joins the $3 trillion market cap club, Tesla up 3.6%. Consumer staples and healthcare down more than 1%.

• FX: USD index slips 0.3%. BRL again a big climber, +0.7% to highest in over a year. CAD biggest G10 gainer, +0.5%.

• BONDS: U.S. yields slip, very slight bull steepening of the curve.

• COMMODITIES: Gold up 1% to new high $3,685/oz, silver at 14-year peak of $42.74/oz. Oil futures up 1%.

Today's Talking Points:

* US-SINO TRADE

U.S.-China trade talks took a forward leap on Monday, with a framework agreement reached to switch TikTok to U.S.-controlled ownership and President Donald Trump confirming he will talk to Chinese counterpart Xi Jinping on Friday.

Tech and AI are very much at the heart of the talks, and there may be a lot of hard bargaining still to be done. Beijing also said on Monday that a preliminary investigation of Nvidia found the U.S. chip giant had violated its anti-monopoly law.

* Tech-tonic fizz

Whether it be price, valuation, or concentration, investors know there are reasonable grounds to at least be cautious on the U.S. tech/AI boom. But it shows no sign of slowing, far less reversing, and on Monday it broke new ground.

Tesla surged on CEO Elon Musk's $1 billion share purchase, Alphabet joined the $3 trillion club, and the communication services sector rose 2.3% - despite Nvidia's lackluster performance on news of China's probe. The sector is now up 27% this year, more than double the S&P 500 index's 12% gain.

* Fragile China

The Chinese economic "data dump" for August has been pretty unambiguous - Asia's largest economy is struggling. The latest readings of inflation, industrial production, bank lending, urban investment and retail sales have all missed expectations, while one of the few indicators to surprise in the upside was the unemployment rate.

This will add pressure on Beijing to inject more fiscal stimulus to ensure this year's growth target of "around 5%" is met. Chinese stocks have climbed sharply lately and the yuan is its strongest this year. But these bets on a sustained recovery may be premature. Again.

U.S. economy braces for twin housing, labor market headwinds

The U.S. labor market appears to be deteriorating rapidly just as the country's housing market is also creaking, two negative forces that risk feeding off each other and smothering economic growth.

On the labor side, the latest sweep of data shows why the Federal Reserve is almost certain to resume its interest rate-cutting cycle this week - the unemployment rate and weekly jobless claims are both the highest since 2021, and unemployed people now outnumber available jobs for the first time in four years.

Meanwhile, pressure in the housing market remains elevated. Average monthly mortgage payments are nearly double pre-pandemic levels, and overall affordability is near record lows. Treasury Secretary Scott Bessent said earlier this month that the government may soon declare a national housing emergency.

He has reason to be worried. High mortgage rates and soaring rents can weigh on consumer spending, leading to lower corporate profits, and ultimately less hiring and more firing. Rising unemployment, of course, puts further downward pressure on spending, creating a vicious negative spiral.

Adding to these worries is the fact that many homeowners can't move even if they want to, as they are locked into ultra-low mortgage rates secured in the aftermath of the pandemic. As a result, mobility is falling, just when the labor market needs a more flexible and dynamic workforce. In other words, at exactly the wrong time.

DECLINING MOBILITY

High mortgage rates and soaring rents are exacerbating a long-standing U.S. housing crisis. The country currently has a record 4.7 million fewer units than it needs, according to realtor Zillow.

That's bad news for the economy – long lauded for its flexibility – because a lack of affordable housing limits labor mobility. That, in turn, can fuel higher unemployment in certain regions and make it hard for businesses in thriving regions to fill positions.

Limited access to housing "directly impacts the efficiency and flexibility of the labor market," says Shelley Stewart III, a senior partner at McKinsey. "Addressing housing affordability can alleviate these imbalances, leading to a more dynamic and balanced labor market."

Indeed, according to academic research cited in a Bipartisan Policy Center report last year, if three of the country's 'productive job markets' – New York City, San Francisco, and San Jose - had adequate housing in the 45 years between 1964 and 2009, the U.S. economy would be 3.7% bigger. Failure to improve housing affordability damages U.S. economic growth over the long term, not just this cycle.

WHAT TO DO?

It's not all gloom and doom, though.

First, technology could help maintain some labor mobility despite the housing crunch. The number of households with flexibility to work remotely and thus live further away from the office tripled between 2019 and 2021, the Bipartisan Policy Center study found. This may partially explain the increased migration in recent years of households to the South and Mountain West from the Northeast and Midwest.

But work-from-home policies can only do so much. Consider that the overall rate of movement within the U.S. was less than 9% in 2022, compared with an annual average of almost 20% between 1948 and 1980.

Next, there are some signs that the housing squeeze may be easing. The recent decline in long-term U.S. government bond yields has brought average 30-year mortgage rates to an 11-month low of 6.35%, while rising inventory and sluggish demand are capping house prices.

But Americans seem unconvinced. Nearly 70% report being concerned about the rising cost of housing, an increase of eight percentage points from a year earlier, according to a McKinsey study. That negative sentiment could chill consumer spending regardless of the facts on the ground, especially when coupled with intensifying job fears.

So what else can be done?

Building new homes is the obvious answer. Investment in the housing sector has a strong multiplier effect on economic growth and tax revenues. McKinsey estimates that investing to close the housing shortfall could create up to 1.7 million jobs and add nearly $2 trillion in cumulative GDP through 2035.

But investment on that scale will be hard to execute, especially when conditions in the sector are so fragile. And it will take time.

In the short term, therefore, the economy can't bank on a housing renaissance. A more realistic hope may be that monetary easing, fiscal largesse and the Trump administration's deregulation drive will provide enough of a tailwind to offset these two rather powerful headwinds.

What could move markets tomorrow?

• UK unemployment

• Germany ZEW sentiment index (September)

• Euro zone industrial production (July)

• Canada inflation (August)

• U.S. industrial production (August)

• U.S. retail sales (August)

• U.S. Treasury auctions $13 billion of 20-year notes
  

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.