US: Navigating uncertainty and Data Dependent times - Macro Musings

"You don't have to be great to get started, but you have to get started to be great" - 

Les Brown

The Employment data and the soft ISM print lead to strong bond buying interest with yields on US2s down 14.80 bps and on US10s down 11.80 bps bps over the week. US2s10s steepened 3 bps to close the week at -32.60 bps from -35.60 bps at end of last week. The Atlanta FED GDPNow estimates were revised lower to 1.50%. 

We did not get any post news drift after the initial sell off in bonds post the Presidential debate barring a move on Monday to 4.795% which was largely faded. Yields on US2s held the 4.76% resistance through the week before dropping sharply. The next support comes in at 4.50% - break below which opens the room for a move likely towards 3.50%.

The markets are now pricing in 51 bps of rate cuts into 2024 with 72% probability of the first 25bps rate cut by September 2024. 

Fed Chair Powell in his speech mentioned that Inflation is now showing signs of resuming its disinflationary trend. He dismissed the focus on core services excl housing in favor of focus on labor market and remarked that Fed is carefully watching the evolving dynamics. The employment numbers continue to be "THE" critical piece in the Fed Easing puzzle. 

The FOMC Minutes state that potential further cooling of the labor market conditions could lead to increased layoffs with Economic activity expected to slow compared to last year. Financial vulnerabilities in Commercial Real Estate and Bank Balance Sheet highlighted as concerns alongside tighter financial conditions and deteriorating household finances as downside risks to economic activity. 

Let's quickly summarize the data here:

The June Manufacturing ISM Report reveals a continued contraction in the manufacturing sector, with the Manufacturing PMI falling to 48.5. Key indices, including New Orders and Production, remained in contraction territory, reflecting weak demand and declining output. Supply executives report that while prices eased, demand remains subdued, impacting production and profitability .

The June Services ISM Report On Business indicates a contraction in the services sector, with the Services PMI at 48.8. This marks the second contraction in three months, driven by declines in business activity, new orders, and employment. Despite easing inflation, respondents report transportation challenges and higher commodity costs.

ADP Employment Report confirmed the trend of slowing Jobs growth with the number at 152K compared to an average of 200K in the previous two months. 

The JOLTS Data (May) came in above consensus with the number of Job Openings rising 221K over the previous month compared to a cumulative reduction of 894K in Job openings in the previous two months. Prior month figure was revised downwards by 140K. Hiring activity increased 141K over the previous month while Separations also increased by 82K on account of increase in layoff activity by 112K Jobs. 

Another of my favorite - vacancies to unemployed ratio was constant at 1.22 and the Vacancy Rate was a tad bit higher at 4.81% from previous 4.67% but in line with the 3 month average.

The NFP number which comes from the establishment survey came in at 206K (above consensus reading of 190K) but the downward revisions to the previous two months were to the tune of 111K. The Unemployment rate inched 10 bps higher to 4.10% and the average hourly earnings rose at a slower than average momentum seen over the last 6 months of 0.32% mom. 

The household survey showed Labor Force increasing 277K with the level of employment rising 116K and the level of unemployment rising by 162K. 

The trailing 12 month (TTM) data for Establishment survey (NFP) shows 2.6mn Jobs created while the Household Survey shows employment level increasing by a paltry 195K. The other time when the TTM divergence was so wide was in April 2020 and April 2021 which eventually resolved over the course of next few months. In the next month, the preliminary benchmark revision to Establishment Survey Data will be released on Aug 21, 2024 wherein survey estimates are benchmarked to comprehensive counts of Employment derived from State Unemployment Insurance. 

For the Employment picture, though the current U/R has increased to 4.05%, the most recent 3m average is seen at 3.96%. The lowest trailing 12m U/R was seen at 3.53% in July of last year. Though the current readings have not yet triggered the Sahm Rule's Recession indicator (threshold of a 50 bps rise ( currently 43 bps), the evolving economic picture suggests a slowdown.

The Jobless Claims data showed Continuing Claims at the highest level for 2024.

The current data definitely contains inflationary concerns and continued softness in economic data reignites the soft landing and the recession debate. You don't know which way it resolves, let price guide you.