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 25 bps and announced a modest plan to taper JGB purchases by Yen 400 bn each quarter from Yen 5.7 trn to Yen 3 trn by March 2026. BoJs timing is in stark contrast to other G7 CBs who have initiated a rate cut or are on the verge of starting to cut rates. Rate cut actions by the BoJ amid weakening domestic growth could be a consequence of declining real wages due to sharp depreciation of the JPY and Political pressure. USDJPY slumped 5.6% (high / low weekly range) and the popular carry trades in USDMXN (MXN interest rates at 11%) and USDBRL (Selic Rate 10.50%) witnessed some unwinding pressure with the pair up 4.76% and 3% respectively. NASDAQ (in JPY terms) fell 10.5% over the week. 

BoE announced a rate cut of 25 bps to 5.00% and Federal Reserve in its Monetary Policy statement mentioned that Employment and Inflation Goals continue to move into better balance. The Economic Outlook is uncertain and the Committee is attentive to the risks to both sides of it's dual mandate. In the post policy conference, Chair Powell mentions that this year's progress on inflation is more heartening since is it broad based across goods, non housing services and housing services as compared to last year when the progress was largely driven by durable goods disinflation. Federal Reserve could cut rates in September or cut them a lot if push comes to shove since conditions are like pre pandemic and there is no tolerance for material cooling in the labor market. 

The Fed Fund Futures are pricing in 82 bps of rate cuts into 2024. It was only last week we spoke about the soft landing narrative being deeply entrenched in the markets and this week's employment data appears to have revived talks of a recession and intermeeting cuts. 

The GDP estimates are holding up with Atlanta Fed GDPNow estimating 2.5% growth for Q3. 

Gold prices were up 2.26% over the week as Geopolitical risk continues to dominate the headlines after the killing of Hamas top leader Ismail Haniyeh and 

Now let's take a quick peek into the Economic Data Releases over the week:

We had the NFP release on Friday and it did 2 things:

1. The U/R rate came in at 4.30% which was above the long term 4.20% level 

2. U/R at 4.30% triggered the Sahm Rule Recession Indicator which signals start of recession when the 3m MA of U/R rises over 50 bps above the minimum of the 3m MA from the previous 12 months. Sahm indicator is at 53 bps.

The prior 2 months data was revised lower by 29K and this month's number was well below consensus reading of 175K. The pace of AHE increase also came in soft at 0.23% mom and Average Hours worked declined by 0.10 hrs. Participation Rate actually ticked 10 bps higher. The increasing supply of labor is seen to be pushing up U/R. Refer to the table below for the numbers.

Now if you all remember, in my earlier blogpost, I had written about BLS' challenges in estimating employment numbers during natural disasters. BLS in the press releases states "Hurricane Beryl had no discernible effect on the national employment and unemployment data for July, and the response rates for the two surveys were within normal ranges." If I were you, I'd tread with caution in extrapolating the trend.

In Q2 2024, U.S. nonfarm business sector labor productivity rose by 2.3%, driven by a 3.3% increase in output and a 1.0% rise in hours worked. Unit labor costs increased by 0.9%, reflecting a 3.3% increase in hourly compensation against a 2.3% rise in productivity. Over the past year, productivity growth was 2.7%, while unit labor costs saw a modest 0.5% increase, the lowest rate since Q3 2019.

The Initial Jobless Claims (IJC) number came in at highest levels for 2024 and the 4W MA now at 238K. 4W MA of IJC was this high last in Aug 2023. The more interesting bit when looking at the 4W MA of Insured Unemployment (CJC) comes from the fact that these levels were last seen in December 2021.

The July ADP National Employment Report shows an increase of 122,000 private sector jobs and a 4.8% annual pay rise. Wage growth is slowing, with job-stayers seeing the smallest increase in three years and job-changers experiencing reduced pay gains. This moderation in wages aligns with efforts to control inflation.

The JOLTS data showed a general decline in job openings, hires, and separations, suggesting a cooling in the labor market. The decrease in quits and layoffs indicates that both voluntary and involuntary turnover are down, which may reflect reduced job switching or caution among workers and employers. This trend could be due to a variety of factors, including economic uncertainties or shifting market conditions. 

Over the course of last 2 years, the Vacancy Rate which is Job Openings / [ Job Openings + Employment Level] has been steadily coming down from a peak of 7.15% in 2022 to the most recent 4.83%. The ratio of Vacancies to Unemployed People is now at 1.20 from a peak of 2.0 in March 2022.

When looking at the JOLTS data, I love to refer back to Governor Waller's speech back in early Jan 2024 where he mentions that if restrictive monetary policy could lower the vacancy rate from 7.5% to 4.5% there would be a relatively small increase in U/R from 3.7% to 4.20% and if the vacancy rate would fall below 4.50% there would be a significant increase in U/R. 

The Manufacturing PMI fell to 46.8, indicating a continued contraction in the sector for the fourth consecutive month and the 20th time in 21 months. Key indices such as New Orders, Production, and Employment showed further decline, while Supplier Deliveries slowed. Demand remained weak, with subdued investment in capital and inventory, and the majority of manufacturing industries, including major sectors like Machinery and Transportation Equipment, experienced contraction. Despite some slight growth in specific sectors, the overall outlook remains challenging for U.S. manufacturing.

Factory Orders fell 3.30% mom below consensus expectations of -2.90% reading. 

Now let's come to the Charts:

1. US2s chart have been moving along predictable lines and the support now comes in at a wider range of 3.64% - 3.81% - a level that saw US2s meet with resistance during the short lived banking crisis in March 2023 and that is likely to be the first braking line to the downward momentum. 

2. Yields on US10s have also opened the week below the H&S neckline and have closed at the lows of the week with the target seen at 2.85%. 

3. As we spoke last week about it, the US2s10s bull steepened and closed the week -9.20 bps. 

4. On the DXY we finally did close below the 103.90 handle and 102 levels is where I see immediate support. 

This week is a relatively light week on the calendar with PMI data, Jobless Claims, Trade Balance on the cards. 

Now I realize this was an enormous post, so thank you for your patience in reading the content and keep your attention focused on risk management. If you missed this week's moves, don't rush into trades - patience opportunism will be the key. There are many and more opportunities in the market to thrive. Wish you the best !!