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  • The Weekend Edition # 139 - The US Employment Situation

The Weekend Edition # 139 - The US Employment Situation

Market Recap: Growth Scare; Macro: US Job Data; The Week Ahead; Calendars

Welcome to another issue of the Weekend Edition!

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Here's what we cover

Market Recap - Growth Scare?

June 24 - June 28, 2024

Markets have remained in a range over the last week. The Citi Economic Surprise Index (CESI) continues to head lower. The CESI shows the difference between official economic results and forecasts. The Index turned negative sometime back, meaning the economic conditions are generally worse than expected.

This week’s Conference Board Consumer Confidence Indicator also declined from 101.3 to 100.4. However, the perceived likelihood of a US recession actually declined after rising in both May and April.

GDP Growth numbers and PCE Inflation numbers came out in line. The final GDP Growth Estimate for the US is now 1.4% for the first quarter - a deceleration from last year’s 2.5%. So while people don’t fear a recession, there are definitely some signs of a “growth scare” with a deceleration in GDP growth.

And this growth scare is what’s driving some of the price action. Markets are still trying to parse the macro data that’s coming in weaker, while also celebrating a deceleration in inflation.

Yields have been moving higher as well, partly because of the currency situation in Japan - the JPY continues to depreciate and there’s been a lot of speculation around intervention. That may mean Japan sells foreign holdings of bonds - namely, the US and the US Dollar, to buy Japanese Yen. This would mean pressure on yields.

Friday saw a spike in Yields, quite likely because of the uncertainty brought on by the US Presidential Debate on Thursday night - something we said could happen.

Quarterly Update

We’re at the end of the quarter. As far as equities are concerned, only the S&P 500 and the Nasdaq ended the quarter in the green. The Dow Jones Industrial Average and the Russell 2000 Small Cap Index both ended in the red - small caps more than the Dow. We’ve warned about small caps since the beginning of the year, and while there’s a lot of consensus growing in buying small caps, we continue to remain somewhat cautious.

On the commodity side, the best performer for the quarter was NatGas and the worst was Bitcoin. We’re seeing some rotation in commodities, as markets start to see lower geopolitical risk and start to move towards a risk-off stance.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - The US Employment Situation

We’re coming up on another “Jobs Friday” as we start off the month of July. The US Employment Situation report has become one of the most watched reports after Inflation Reports, simply because it could mean the key to the Fed cutting rates. The Fed has said time and again, significant weakness in the job market could lead them to reconsider their stance on rate cuts.

The Establishment Survey & Household Survey

As it stands, we’re seeing signs of overall weakness in the various reports that come out - but the main two numbers that everyone watches are the Nonfarm Payroll Additions (Establishment Survey) and the Unemployment Rate (Household Survey). The Nonfarm Payroll (NFP) provides estimates of jobs, while the Household Survey provides estimates of employment status.

No doubt, much of this data is lagging and survey-based which means that they don’t carry a high degree of accuracy. But recently, we’re seeing an even bigger divergence between the two with the Unemployment Rate trending higher (fewer job additions) while the NFP shows higher job additions.

Some of this can be explained away by the revisions made to the NFP report but, even the Fed Chair talked about the difference being puzzling and taking the numbers as they are.

The Unemployment Rate has now reached 4%, i.e., the Fed’s projected number for the year, while the NFP continues to add jobs, although not only has the number been trending lower but, there have been downward revisions as well.

Other Data Points

Average Hourly Earnings

Wages are an important indicator of the strength of the labor market. When there is a lack of people willing to work, a company will obviously pay more to attract and retain employees. However, as the economic situation becomes more challenging, companies may have to cut costs. People may get fired, there may be an influx of workers due to immigration or people who had savings / gigs / self-employment are looking to go back to work. All of these are applicable to the US right now and could be the reason that wages are gradually declining = weakness in the labor market.

Average Hours Worked

Average hours worked is declining. This is usually a telltale sign of the labor market softening. Average Hours Worked decline when there are more part-time workers - when companies don’t want to make a major commitment to a full-time employee. It could also mean that companies are cutting hours for existing workers, to pay them less. But basically, some weakness in the labor market.

Job Openings

This comes from the JOLTS report, which usually comes out right before the Employment Situation Report. As of the last reading, the number is down to 8.059 million, which as you can see from the chart is still above the pre-pandemic levels but, gradually declining. We’ve said that the level needs to come down to 7.5 million for balance to be restored.

The Indeed Jobs Posting tracker is also showing fewer job postings, which ties in with the JOLTS report.

Quit Rates

Next up we have quit rates. We see this dropping. not surprisingly, we had a lot of people quit during the pandemic primarily because of the wealth effect. There was also fear, particularly in the healthcare sector. And other reasons, such as having to take care of their kids at home.

As the economic situation becomes challenging, fewer people quit their jobs, so we see the quits rate decline. As of the last reading, the quits rate has declined to below pre-pandemic levels.

Articles this Week

Closing Thoughts - The Week Ahead

The US Labor Market staged a remarkable recovery, and ended up being extremely tight where there was a massive imbalance between demand and supply. The market is moving back into better balance, as Fed Chair Powell likes to say. Well, I could add that we are in fact, seeing some signs of weakness. How fast this develops into a full blown crisis, no one can tell. But, we do know that the economy still remains relatively resilient and this could mean that the labor market’s weakness develops gradually - gradually enough that the Fed can have their higher for longer plan!

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

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Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

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