So, what if the payroll report
Was wrong, and job numbers fall short
When they are revised
And so, they disguised
The ‘conomy’s on life support
 
Will this mean recession is here
And Jay will get rate cuts in gear?
But if that’s the case
Are stocks the right place
To hide with a future, austere?

 

After last week’s remarkable rally that has reversed so much of the negativity inspired by the BOJ/yen carry trade unwind/end of the world scenarios from just two weeks ago, this week is starting off in a fairly muted manner.  Add to this the fact that the data stream this week is limited, and you have all the makings of a quiet, summer doldrums-like, period.  Except…Thursday begins the KC Fed’s Jackson Hole symposium and Friday morning at 10:00am EDT, Chairman Powell will be speaking.  This speech often has great significance as historically, Fed chairs will give strong clues about policy changes coming at this exact opportunity.  This is not to say Powell is going to give us a schedule of his planned rate cuts, but more that he has the chance to explain his (and by extension the Fed’s) reaction function to future data releases.

It is this topic that is critical for us to monitor as lately there have been several articles regarding the nature of the annual benchmark revisions to the payroll reports that will be coming early next year.  The punch line is that expectations are growing that much of the NFP growth seen thus far in 2024, currently totaling ~1.4 million new jobs, may be erased, with estimates of downward revisions rising to 1 million or more.  For instance, in California, the Legislative Analyst’s Office, which is a non-partisan (assuming such a thing exists) group under the auspices of the California state legislature, has revised down their job growth estimates for all of 2023 to just 9K from well in excess of 100K in the initial reporting.  Given California’s status as the largest state in the union and its general importance to the economy, this is quite concerning.  

The BLS revisions will not be released until March 2025, but there have been numerous concerns registered by economists and analysts of all stripes indicating that the BLS model, specifically the birth-death portion regarding new businesses, is wildly out of sync with the reality on the ground.  One of the things that has allowed the Fed to maintain their higher for longer stance is their belief, based on the BLS data, that the employment situation is still quite solid in the US.  Of course, the recent rise in the Unemployment Rate is beginning to raise some eyebrows, but those who believe there is no recession will point to the increase in job seekers in the latest report, essentially raising the numerator rather than reducing the denominator in that data point. And maybe that is true.  However, the vibe that appears to be growing around the country is that the job situation is not as robust as the numbers might indicate.

The implications of this are that it is entirely possible that the minority of analysts who claim we are already in a recession will turn out to have been correct, and the NBER will backdate the beginning of the recession to early this year.  As to the Fed, they will find themselves in a much different place and be forced to cut rates far more aggressively than what seems to be the current belief in the Eccles building.

Right now, the Fed funds futures market is pricing in a bit more than 200 basis points of cuts by September 2025.  While that seems like a lot, if the economy is actually in recession already, that is likely understating the case.  When it comes to the tradeoff between inflation and recession, while Powell was able to talk tough regarding recession when it didn’t seem to be coming, methinks he will have a different tone if these job numbers are revised as dramatically as some are contending.  And let’s face it, if the California government is explaining that is the case, along with some research by the Philly Fed, which is also indicating less job growth than initially reported, this could well be the 2025 story of note.

To summarize, questions regarding actual job growth vs. reported job growth are starting to be asked.  If the answers lean toward the negative end of the spectrum, the likelihood of more aggressive Fed easing rises. However, the specter of inflation looms large in the background as despite its seeming recent quiescence, it is not nearly back at the Fed’s target level.  Can the Fed cut aggressively if inflation remains above target?  Of course they can, and if the economic situation deteriorates rapidly, they almost certainly will.  But that will not solve the inflation problem.  If, and it is a big if, this is the case going forward, my longstanding contention of a significant decline in the dollar versus commodities will likely play out.  As well, I would not want to own duration in the bond market, and while stocks might start out ok, recession does not pad profit margins, it impairs them, so stocks will have trouble as well.

In the meantime, let’s look at what happened overnight.  Friday’s continuation rally in the US saw some follow through in Asia, but it was truly a mixed picture there.  Japan’s Nikkei 225 (-1.8%) fell sharply as the yen rallied more than 1%.  Remember, about 40% of the Nikkei’s profits come from international sales and activity, and as the yen strengthens, it impairs those earnings in local terms.  Elsewhere, China (+0.3%) and Hong Kong (+0.8%) fared well, but Korea (-0.85%) suffered.  The other markets showed marginal gains.  In Europe, though, Spain (+1.0%) is leading the way higher although the rest of the continent is seeing much more limited gains, on the order of +0.25%, as a lack of new data or commentary seems to be allowing for a follow-on from the US session Friday.  UK shares are unchanged and so are US futures as traders await the big Powell speech on Friday.

In the bond market, Treasury yields are lower by 1bp, and we are seeing slightly larger yield declines in Europe, with sovereign yields down by between -2bps and-4bps.  Again, a lack of data and commentary means this is trading inspired, and not based on new information.  JGB yields rose 1bp, perhaps in sync with the yen’s rise overnight.

In the commodity markets, oil (-0.9%) continues to suffer as the slow growth, slowing demand story is the driver with absolutely no concern over the potential for an increase in supply tensions based on the ongoing wars in Ukraine and Israel/Gaza.  Meanwhile, gold (-0.8%) which closed above $2500/oz on Friday for the first time ever, is consolidating a bit and dragging silver (-0.5%) with it.  Interestingly, copper (+0.5%) is holding its own despite the slowing growth story.  That seems to be much more of a technical trading story than a fundamental one, although the long-term fundamentals remain quite bullish in my view.

Finally, the dollar is under further pressure this morning, falling against all its G10 counterparts and many of its EMG counterparts as well.  it should be no surprise that CNY (+0.3%) is stronger alongside the yen, but we also saw KRW (+0.85%) really benefit and almost every EMG currency, save MXN (-0.3%), which is today’s ultimate laggard.  If the story is turning to more aggressive US rate cuts, the dollar will continue its decline.

On the data front this week, there is not much other than the Jackson Hole symposium, but here it is for you:

Today	Leading Indicators	-0.3%
Wednesday	FOMC Minutes
Thursday	Initial Claims	230K
	Continuing Claims	1881K
	Flash Manufacturing PMI	49.5
	Flash Services PMI	54.0
	Existing Home Sales	3.92M
Friday	New Home Sales	630K

Source: tradingeconomics.com

So, as you can see, other than Powell on Friday, and three other Fed speakers (Waller, Bostic and Barr), earlier in the week, there is not much to see.  My take is the rate cut narrative is building momentum and that we are going to see further pressure on the dollar until either the data indicates no cuts are coming, or we have a more significant risk-off event where people run to dollars to hide.

Good luck

Adf