Tag Archives: NFP

Doomsters to Press

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The Payrolls report was a mess
But job losses added no stress
And so, once again
We’re back to the yen
As reason for doomsters to press

The claims being made are dramatic
Describing T-bonds as asthmatic
Explaining that Scott
Has now lost the plot
While calling his viewpoint erratic

So, what’s really happening here?
Is it true the end point is near?
I’m happy to say
Those fears I’d allay
At least through the end of next year

Once upon a time, a very smart economist, Larry Kantor, explained to me that the best signal for the economy to follow over time was the Unemployment Rate.  When it was falling, it was a strong indication that economic activity was increasing and vice versa.  But I think that is a world which no longer exists.  I make that point because Friday’s NFP report showed that the Unemployment Rate fell to 4.1% despite the fact the payrolls shrank.  Below is a chart of the Unemployment Rate since 1947 along with the average (5.7%) during that period.  The data comes from FRED although I calculated the average

Arguably, the first thing you notice is that the current Unemployment Rate is quite low relative to history, in fact it is in the bottom quintile.  But Mr Kantor’s observation was based on the then prevailing, and historical thesis of steady population growth, a thesis that has been called into question lately.  Between the aging of the population and the significant changes in immigration activity (i.e. the 2 million or so deportations recently), it is not clear that a declining Unemployment Rate is indicative of strong economic activity.  It could simply be a signal that the population is falling more quickly than job growth.

But looking at the report as a whole, it was quite confusing.  While Payrolls decline by -23K, Private Payrolls rose 30K and Manufacturing Payrolls rose 5k.  A shrinkage in government jobs seems quite positive to me.  However, Earnings data was a bit soft falling to 3.2% Y/Y, lower than the inflation rate.  Net, it is hard to draw many conclusions from the report although we did see the Fed fund futures market reduce the probability of a September hike to 56% from 66% prior.  Certainly, on the surface it hardly strikes that this is encouraging a rate hike.  And the stock market was non-plussed, rallying across the board.

Which takes us to the other story that continues to garner huge amounts of attention, the yen and the rationale behind the US joining Japan to intervene as well as what that will mean going forward.

I will try to boil this down.  The angst is attached to the carry trade, which, neatly defined, is borrowing JPY and paying a very low interest rate, converting the yen into another currency, typically USD, although AUD, MXN and BRL are also popular, and then earning the higher interest rate in those currencies.  It can be a highly profitable trade when currency volatility is low as the trader simply earns the difference between the interest rates each day.  The risk is there is a sudden move in the FX rate which can wipe out weeks or months of carry.  Hence the concern over intervention when we see the FX rate move 5% in a day like the end of July.

Estimates of its size run from $500 billion to $1.5 trillion, although nobody really knows.  I would err on the high side.  But there is another piece that is rarely discussed but I think must be considered in this conversation, and that is the outward investment flows from Japanese investors around the world, again largely to the US, but elsewhere as well.  I asked Grok to create a chart of net investment outflows from Japan from 2000 to present and got this:

Other than 2022, when the Fed started hiking rates aggressively and bond prices fell sharply, it has been pretty consistent.  The net amount of outflow over this time period is approximately ¥347.5 Trillion (again according to Grok) which at the average FX rate over the period of 112.40 works out to about $3.1 Trillion, arguably much more than the ‘pure’ carry trade.  But I don’t believe you can ignore that as if the Japanese are going to bring money home, it will be there as well.

Of course, there is no indication that is what they are doing at this point, despite all the hypotheticals about that being the major risk.  The Fiscal situation in both the US and Japan is awful, with both nations running huge budget deficits and showing no signs of changing that.  Inflation has been rising in both nations and a key prescription by many is that both central banks should be raising interest rates.  Of course, if the Fed raises and the BOJ waits, that widens the differential and will theoretically put more pressure on the yen.

The key concern and the favored story as to why the US helped Japan is that they didn’t want the BOJ to have to sell Treasuries to fund their USD sales.  Much has been made of the fact that the US sold EUR, not USD, but that is because the Treasury doesn’t keep USD in the Exchange Stabilization Fund, just EUR and JPY and a bit of some others like GBP, so they sold what they had.

The big fear is that the US cannot afford for Treasury yields to go higher (although it seems these same folks are clamoring for the Fed to hike rates) and so will do all they can to prevent that.  Now, the funny thing is that if you are Japanese and you own USD assets, you are thrilled with the weak yen as it enhances your return.  While Takaichi-san doesn’t like the weak yen as it exacerbates inflation, I don’t think Japan’s asset holders are clamoring for a strong yen. Remember this, too, that the long-term average yield on US 10-year Treasuries is 5.81%, more than 100bps above where we are today.  It is fair to say that recent lower yields are the exception, not the rule.

To my eye, the harder needle to thread in this process is for Japan, which really doesn’t want to see its massive foreign investment decline in value, although they are concerned about inflation.  For the US, while the fiscal situation is a major problem, it remains a problem for the future.  I’m pretty confident everybody in the world will still accept dollars for payment if they are offered.  The dollar is not going to collapse, nor is the bond market.  While pressure continues to build over time, it is going to take a LONG time.  Mark my words.  The end is not nigh!

In the meantime, JPY (-0.7%) looks like it is repeating the pattern after the last intervention attempts as per the below chart.  As I have maintained, unless there are policy changes, a strong yen is not coming soon.

Source: tradingeconomics.com

Speaking of the FX market writ large, this morning has seen very little net movement across almost all counterparts with KRW (-0.7%) the only other currency moving more than 0.1% in either direction.  We have discussed the won several times recently and while the alleged proximate cause for this decline is increased uncertainty over the Strait of Hormuz, given the huge gains seen in the past 6 weeks, this is nothing more than a blip in a strong trend.

In fact, lack of movement aptly describes the bond market as well with yields on Treasuries and across all European sovereigns within 1bp of Friday’s closing levels.  Apparently, fears of the apocalypse have been put on hold for the moment.

In the equity market, Friday’s US rally has seen a general follow-on by both Asia and Europe.  Overnight saw modest gains in almost every Asian market (Tokyo +2.1%, China +0.2%, HK +1.1%, Korea +0.7%, Taiwan +1.6%, etc.) although Australia (-0.3%) managed to buck the trend.  Given the resource focus of the Australian economy, and the recent gains in metals prices, that is a bit of a surprise.  As to Europe, Germany (+0.4%) is the leader of the pack with both France and Spain basically unchanged while the UK (-0.3%) lags slightly, albeit lacking any new news.  US futures are essentially unchanged at this hour (6:45).

Finally, oil prices (+1.4%) are firmer this morning as the ongoing saga over the Strait remains cluttered with confusion as to if a deal is coming close, or not and what role, if any, the US is going to play.  Personally, I’m ready for the US to exit the area, but they don’t ask me.  As to the metals markets, gold (-0.1%) is consolidating after a very strong performance last week, rising 7%, and silver (+0.8%) is continuing last week’s gains.  But to me, copper (+0.5%) is the metal with the most upside as the supply/demand characteristics of the market, (not enough is mined to satisfy annual needs and the timeline to bring a new mine up to speed exceeds a decade), imply higher prices still despite the fact we are already at record levels.

And that’s all.  We have no data today although CPI comes Wednesday.  I will look at data tomorrow as I have already gone too long this morning.

Good luck

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Futures Are Juiced

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At first, it was open then not
As small boats attacked and were shot
But now, all eyes turn
To what we will learn
From Payrolls and if things are hot

While yesterday saw risk reduced
This morning stock futures are juiced
So, as we await
More news from the Strait
We’re hoping Jobs give things a boost

The top story was the minor skirmish in the Strait of Hormuz when three US destroyers transited the Strait and escorted one or two ships trapped in the Persian Gulf out.  Iranian small boats attacked and were sunk, but missiles were fired and it seems they hit a Chinese tanker.  I’m guessing President Xi is none too pleased with that outcome.  In the end though, while oil (-0.2%) traded higher through most of yesterday, as you can see in the chart below, it subsequently faded back from its highest levels of the day and remains well below $100/bbl as I type.

Source: tradingeconomics.com

In the end, the major market themes and correlations continue to play out with oil the primary driver and other markets responding either in sync (the dollar and bond yields) or in opposition (stocks and precious metals).  I imagine we are going to see this continue to play out until such time as an agreement is definitively reached to end all the hostilities there, whether that is by signing an accord or the complete destruction of the IRGC leadership.

Which means, we need to turn elsewhere for our news and happily, we have the payroll report to observe this morning.  Leading into this report, we saw the ADP number on Wednesday print at a better-than-expected 109K, while Initial and Continuing Claims yesterday both printed at lower than forecast numbers, indicating that the labor market is in pretty good shape.  With that in mind, here are this morning’s expectations:

Nonfarm Payrolls62K
Private payrolls75K
Manufacturing Payrolls5K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.2
Participation Rate61.7%
Michigan Sentiment49.5

Source: tradingeconomics.com

Of course, it is key to remember that revisions to this report have been consistently lower over the past several years as per the below chart.  Of course, headlines are everything in today’s world, and while there are many economists and analysts who try to explain the revisions matter and offer a much dimmer view of the labor market, as we all know, the correction to a misleading story published on page 24 never impacts the narrative.

In fact, based on this, and what is apparently a fatally flawed birth/death model at the BLS, and based on the stronger performance in the ADP data as well as the continued low readings from Initial Claims, I anticipate a better than expected number and would not be surprised to see something on the order of 100K.  There is one other thing worth noting that I believe is a major positive, and that is that government payrolls continue to shrink, something that can only help the overall fiscal position in the US.

We can only hope that the recent trend, as seen below, continues.  As I have written in the past, given the remarkable lack of productivity in the government, if these people become baristas at Starbucks, it would add more to economic prosperity for the nation than their current role.

Source: tradingeconomics.com

And with that as preamble, let’s visit the overnight market results in the wake of the little skirmish and President Trump’s comments that the cease fire was still in effect.

Yesterday’s US weakness has been followed around the world, pretty much, with declines in Asia (Japan -0.2%, HK -0.9%, China -0.6%) and the regional exchanges there as well (India -0.7%, Taiwan -0.8%, Australia -1.5%, Indonesia -2.9%) with only Korea (+0.1%) managing to hold its ground during the session.  There is much discussion regarding the upcoming Summit between Presidents Trump and Xi, and the other stories of note are yet another Chinese plan to support domestic consumption.  (It strikes me that these plans are akin to European sanctions on Russia, full of fanfare and producing zero results).

Speaking of Europe, equity markets are weaker there as well with the DAX (-0.7%) leading the way lower after IP was released at a much worse than expected -0.7% in March along with a smaller than forecast trade surplus.  A quick look at the last 3 years of German IP and you can see that Energiewende, their insane energy policy, is effectively deindustrializing the nation, once the heartbeat of Europe.

Source: tradingeconomics.com

As to the rest of the continent, red is today’s color with France (0.7%), Spain (-0.3%) and the UK (-0.1%) all under water.  However, US futures are higher by about 0.5% across the board ahead of NFP.

In the bond market, Treasury yields (-1bp) are reversing part of yesterday’s climb, but are still higher than yesterday morning.  Most of Europe is little changed although UK gilts (-5bps) have performed best after (despite?) local elections where the ruling Labour Party lost half the seats they were defending with the MAGA-like (MUKGA? MEGA?) Reform Party of Nigel Farage and the Green party the big beneficiaries.  Pressure is increasing on PM Starmer to step aside as his favorability plummets, but like most politicians, he is clinging to power with a death grip.  I’m not really sure I understand the mechanics of why gilts would rally, although perhaps as Reform’s power increases, investors believe there will be more fiscal rectitude.

Precious metals, which rallied yesterday again, are continuing higher this morning (Au +0.8%, Ag +2.8%) with Silver back above $80/oz.  I have not mentioned copper (+1.7%) lately, but it is worth noting that the red metal has been powering higher and is approaching the spike high seen in late January, which is the all-time high in the market there.  While there are clearly market internals regarding positioning that are helping the move here, it does portend a positive outlook for the economy given its importance in virtually all manufacturing these days.

Source: tradingeconomics.com

Finally, the dollar is under pressure again this morning with the DXY (-0.1%) back below 98.00, but just barely.  Again, the collapsing dollar narrative makes no sense to me and if I look at the DXY over the last year, 96.50 – 100.00 does a pretty good job of containing the entire range as per below.  If the dollar gets down to that lower level and breaks it convincingly, we can discuss the merits of a short-term vs. long-term view on the dollar’s future.  

Source: tradingeconomics.com

And it is important to note that the long-term future, at least compared to other fiat currencies, remains positive in my view.  Looking at specific movers, both the euro and pound are higher by 0.35% while the yen (+0.1%) remains caught between its negative fundamentals and fears of another round of BOJ intervention.  NOK (+1.3%) is kind of surprising given the lack of impetus in the oil market, but it is no surprise to see ZAR (+0.6%) and CE4 currencies benefit alongside the euro.  LATAM currencies are also doing well although CLP (0.0%) is somewhat surprising given copper’s strong move higher.

And that’s really it today.  We see payrolls in a bit and that should drive the discussion unless there is some other breakthrough in Iran and the ongoing conflict.

Good luck and good weekend

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Like an Avalanche

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Like an avalanche
The Nikkei collapsed last night
Is there more to come?
 


The thing about markets is that they have an extraordinary ability to confound everyone.  For instance, last night, the Nikkei (-5.8%) essentially collapsed, falling more than 3% on the opening and continuing lower from there.  This takes the “correction” in this index to more than -16% in the past three weeks as you can see from the chart below.

Source: tradingeconomics.com

I have seen several explanations for the move but the one thing I have learned over time is that the biggest moves often lack a specific catalyst.  Rather, an accurate post-mortem of the situation would indicate that prior to the collapse, the market was in a ‘critical state’, a state where there are many inherent flaws beneath the surface that can combine to drive a single significant move. (If you have not already read Ubiquity by Mark Buchanan, I cannot recommend it highly enough as it is both extremely well written and discusses this exact situation and how it plays out across all systems, including financial ones.) At any rate, the essence of the idea is that systems develop ‘fingers of instability’ within their structure over time.  These can be things like the extreme concentration in the Mag 7 stocks compared to the rest of the S&P 500, or the fact that earnings for a majority of the S&P have been declining despite the index making new highs.

I will be the first to admit I do not know the inner workings of the Nikkei at all.  However, I am confident that there were numerous fingers of instability beneath the surface that led to this move.  Arguably, some of those were the recent appreciation in the yen, which has rallied ~8% in the past month with a negative impact on Japanese exporter earnings.  And of course, just Wednesday night the BOJ tightened policy in a surprising move, but as importantly, explained they would be reducing their QQE, and that further tightening was likely going forward.  Finally, the US market, especially the tech sector, has been under some pressure as well given some lackluster earnings reports by key Mag 7 players.  Combine all that and you have a situation ripe for a major correction.  It’s just that it is rare to put it all together ahead of time. 

With payrolls the topic today
The pundits don’t know what to say
Is good news still bad?
Or will bears be glad
If payrolls, real weakness, betray?
 
Cause yesterday’s markets were rough
For holders of risk-laden stuff
The data was weak
And havens were chic
Investors have had ‘bout enough

Which takes us to this morning’s payroll report.  Before that discussion though, it is important to touch on what yesterday’s data revealed.  It started with the highest Initial Claims data in almost a year, far higher than forecast and as you can see in the chart below, there certainly seems to be a developing trend.

Source: tradingeconomics.com

Continuing Claims were also much higher, their highest in nearly three years, and an indication that getting jobs is a lot harder these days.  While the Productivity data was solid, the ISM data was anything but, printing at 46.8, the 22nd time in the past 23 months that it has printed below the 50.0 level of growth/contraction.  And Construction Spending was also weak.  The point is that yesterday had the feel of a much weaker economy than what we have been seeing previously.  And more importantly, the market response seems to have changed from bad news = good, to bad news = bad.  Previously, weak economic data encouraged the idea that the Fed would cut, and risk assets rallied.  But now that the Fed passed on their opportunity to cut this week and will not meet again until September, bad news implies the Fed is falling further behind the curve, and risk assets are suffering accordingly.  Now, with that is intro, here are today’s expectations:

Nonfarm Payrolls175K
Private Payurolls148K
Manufacturing Payrolls-1K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (3.7% y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Factory Orders-2.9%

Source: tradingeconomics.com

Certainly, the tone of the recent data has been soft, and the ADP Employment number was much lower than expected at 122K.  This might lead one to believe that today’s number will be soft as well, with a headline print of 125K – 150K.  If that happened, I don’t think anyone would be surprised.  But here’s the thing about markets, they seem to exist to cause the most pain possible before heading where they are supposed to go.  As such, there is a small part of me that believes we could see a better-than-expected outcome, perhaps over 200K again, just to confuse people.

However, if the report is soft, I expect that will weigh further on risk assets, and based on the US futures market at this hour (7:00), that is the general expectation with all three major US indices having fallen by more than -1.0% following yesterday’s rout.  So, let’s look at how the rest of the world is handling this collapse in Japan.  Every major market in Asia fell, mostly by more than -2% with notable declines in Taiwan (-4.4%), Korea (-3.6%) and Hong Kong (-2.1%) although the CSI 300 on the mainland fell only -1.0%.  In Europe, the picture is all red, but the magnitude of the declines is not nearly so dramatic, DAX (-1.5%), CAC (-0.7%), FTSE 100 (-0.3%).  Of course, given this seems to be related to a tech stock decline, this should be no surprise as there is no real tech in Europe.

Bond yields are lower everywhere after a sharp decline yesterday as well.  Treasury yields are below 4.0% for the first time since their brief foray below that line at the beginning of the year, back when markets were pricing in 6 rate cuts this year.  Net, 10-year Treasury yields have decline 13bps since yesterday morning.  European sovereign yields are also declining in a similar manner, down between 8bps and 10bps from yesterday morning but the real surprise is in Japan where 10yr JGB yields have tumbled 9bps.  It seems that there is more to the decline in USDJPY than simply unwinding the carry trade and covering JPY shorts.  It looks as though some institutional money is heading home.

In the commodity markets, traders don’t know what to think.  Will a war in the Middle East cause significant supply disruptions?  Or is the evidence of a weak economy now too great to overcome and set to drive oil prices lower again.  This morning, WTI is slightly softer (-0.2%) but I would come in on the side of weaker growth being a drag.  Remember, there is much spare capacity in Saudi Arabia if supplies tighten.  But the real story is gold (+0.5%) which has rallied to yet another new all-time high this morning and is dragging the rest of the metals complex along with it.  In the end, I think in many eyes around the world, if not in the US, gold remains the ultimate safe haven, and when the fan gets hit, people want it in their portfolios.

Lastly, the dollar is under real pressure this morning, opposite its haven characteristics but for a good reason.  A quick look at the CME futures shows the market is now pricing a 24% chance of a 50bp cut in September, and if the data continues to weaken, especially this morning’s NFP, I expect there will be pressure growing for an inter-meeting cut.  So, the euro (+0.4%) looks healthy by comparison and USDJPY continues to trickle lower, but the big surprise is CNY (+0.55%) which has had its largest daily rally since early May.  I maintain that the PBOC will be happy to allow the renminbi to strength as long as it lags the yen.  And lately, every currency has been lagging the yen with the big carry trades amongst the worst performers.  But the chart of CNYJPY below demonstrates that the PBOC is likely not that concerned about a little strength vs. the dollar right now.

Source: tradingeconomics.com

And that’s really all for the day.  I don’t see any Fed speakers on the calendar, but given the market movements lately, I expect we will hear from at least one FOMC member.  Ahead of the NFP, things will remain quiet, but that will set the tone.  To my eye, this correction has further to go, and if all those analysts who have been digging into the data and claiming we are already in a recession prove to be correct, watch for the Fed to be far more aggressive than currently priced.  That means the dollar has a lot of room to decline in that situation.

Good luck and good weekend

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