Moderation in Labor Demand - NFP | PMI Prices Paid Component a matter of concern

Moderation in Labor Demand - NFP | PMI Prices Paid Component a matter of concern | Weekly Run Down 29 Apr - 03 May 2024

The Fed Fund Pricing for cumulative rate cuts into 2024 shifted from last week's high of -34 bps to -46 bps and US2s10s bull steepened 2.50 bps over the week. US10Y yields were down 18 bps over the week with 10Y inflation indexed bonds driving gains of 12 bps and the 10Y break even inflation rate driving gains of 6 bps over the week.

DXY found resistance at the 106.50 levels and came tumbling down to end the week at 105.08. JPY rallied on BoJ intervention while crude oil prices declined sharply to a 7 week low on an unexpected rise in U.S Crude Inventories.

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This week saw significant gyrations in risk assets. The post looks at data in 2 bits - Employment Data and the PMI Data.

The data began the week with the Employment Cost Index rising 1.2% QoQ followed by the ADP Employment Change which showed private payrolls increase by 192K and 3m average at 192K. The Jobless claims data had no surprises with claims at very low levels.

JOLTS Job Openings showed labor market coming into better balance as not only the Job Openings declined but also the Quits Rate which shows Employee's confidence in finding employment which typically happens in a red hot labor market declined and the Layoffs number were the largest seen since Apr 2023.

The mother of all data prints was the NFP print summarized below with headline print coming in softer than expected, U/R ticking very marginally higher, Avg Hourly Earnings rising at a much subdued pace of 0.20% mom and the 3m annualized rate of rise at 2.80%.

Interestingly, the vacancy rate declined to 5% from peaks of 7.20% seen in Mar 2022 and the ratio of vacancies to unemployed people fell to 1.32 from close to 2 vacancies per unemployed person during the same time (Mar '22). If one was to refer back to Governor Waller's speech on Jan 16, 2024 wherein he asserted if the vacancy rate continued to fall below 4.50% , there would be a significant increase in unemployment rate and until such time the moderation in labor demand will likely play out through a decline in Job vacancies. This has broadly what is reflecting in the Employment data but we may be reaching the point of reckoning sooner than the broad consensus believes.

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S&P Global Mfg PMI reading came in at 50.0. The ISM Mfg PMI reading came in at 49.20 with weakness seen in New Orders Subcomponent (49.10) and strength in the Prices Paid component with a reading of 60.90 and the construction spending declined 0.20% mom. The S&P Services PMI data showed expansion at 51.30 vs 50.90 prior but the ISM Services showed showed contraction at 49.40 vs prior 51.40. The employment sub component showed softness 45.90 vs prior 48.50 and new orders also showed declining trend at 52.20 vs prior 54.40. The concerning print was the prices paid sub component which rose to 59.20 vs 53.40 prior reading.

While I find the divergence between the S&P and the ISM indices intriguing, read here for details.

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We had the FOMC Rate Decision which Mohm El Erian sums wonderfully “Fed was more hawkish than previously signaled but less hawkish than where the markets gotten to on the basis of recent inflation data.”

Fed Chair also commented that there’s a high bar right now for the Fed to cut rates, but there's an even higher bar for the Fed to resume rate hikes. He's still expecting inflation to come down, in large part because of the shelter disinflation everyone has expected. Durable decline in inflation towards the 2% target or a significant rise in unemployment could prompt Federal Reserve to cut rates.

Notable announcements

The Committee will slow the pace of decline of its Securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.
The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.

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Next week is data light after the barrage this week with the exception of Fed Speak which will likely add to vols.

Comments

The Moment of Reckoning is here !! 25 or 50 Bps and the SEP || Benign PCE Expectations || USDJPY 145.75 or 137.50 ??

“Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme and people start to say "this time it's different." They cite the changes in geopolitics, institutions, technology or behaviour that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero.” ~ Howard Marks Bonds continued to rally this week with yields on US2s printing a high and low range of 3.71% - 3.55% to close the week at 3.584% and US10s printing a high and low range of 3.76% - 3.6050% to close the week at 3.655%. I highlighted in my blogpost on Aug 31, the triangle breakout target at 15.50 bps on US2s10s. We dipped to -0.004% on the CPI release and closed the week at 0.0710%. On Crude Oil prices we dipped to lows of $ 68.71 but closed the week higher at $ 72.09. ECB annou...

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"I fear not the man that has practiced 10,000 Kicks once, but I fear the man that has practiced one kick 10,000 times." ~ Bruce Lee Morning Everyone , This Week gave us a sense of how the prices or inflation has evolved and we had benign readings across CPI and PPI and the updated PCE estimates are now for a reading of 0.01% mom on the headline PCE and -0.01% on Core PCE Prices which translates to an annual reading of 2.4% yoy and 2.4% on Core PCE Prices. The Implied pricing off Fed Fund Futures is now pricing in o ne full 25 bps of rate cut into the September Policy and 61 bps of cumulative rate cuts for 2024. If you go further out the curve, 100 bps is priced in until March 2025 and 138 odd bps until June 2025. In the 23rd June Wrap, I had written On the DXY, 106.25 is a crucial resistance zone for DXY bears and an important point of reversal. So keep a watch on the levels with SL above 106.75. DXY declined over the last 2 weeks fro...

The Pendulum Swings Again - From Soft Landing to Fears of a Recession | Employment | US2s and US10s Technical Levels | Macro Musings

As Howard Marks says The most important thing is "Awareness of the pendulum'. The mood swings of the market resemble the movement of a pendulum. Although the mid point of the arc best describes the location of the pendulum "on average", it actually spends very little of its time there. In fact, it is the movement towards an extreme itself that supplies the energy for the swing back. Investment markets follow a pendulum like swing - b/w euphoria and depression, between celebrating positive developments and obsessing over negative ones and thus between over priced and underpriced. While we may not know what the futures holds but me must have a fair sense of where we are headed. I hope this blog has helped you navigate the course of the markets by identifying these pendulum type swings and through the analysis, has helped you get a sense of how the data is evolving. The Economic calendar was heavy with Top Tier Data. BoJ raised the overnight call rate by 15 bps to 2...

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As identified in the last blog post, USD Index made a low of 100.51 on Tuesday and retraced to close the week at 101.732 . I will be closely looking at how the price action evolves around the 102.50 levels to re-initiate shorts. In my post earlier, we identified the first braking zone to the downward momentum on USTs as the 3.64% - 3.81% zone where US2s found resistance. During the week, Yields on US2s dipped to 3.848% before closing the week at 3.92% inside of the 3.90% - 4.10% range seen for better part of the month. The steepening trend persisted this week as the US2s10s closed the week at -0.014%. On US10s, yields moved higher to close the week at 3.907%. I'm looking at 2 spots to re-initiate trades on US2s ~ 4.10% and 4.20% handle. The break in US2s10s outside of the triangle targets 15.50 bps. US economic data shows a softening trend but it does not outright suggests a sharp deceleration to warrant further pricing of rate cuts. The thought is predicated o...

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Shroedinger's Cat ~ Preparation is the Key to play markets || US Politics || Macro Musings

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