Hawkish Fed gets new ammunition as once-hot economy smolders

The biggest surprise of the week was an unexpectedly large increase in the Salary Employment Report. At +528,000, more than double his optimistic consensus estimate of +250,000. Most of the major stock indices had a slightly positive week (see table), but neither the stock or bond markets liked the salary numbers.

In Bondland, on Friday (August 5), 10-Yr. US Treasuries rose from 2.66% on Wednesday to close at 2.83%. Yields have been lower since mid-June as bond markets priced in a recessionary scenario, with the Fed beginning to pivot toward his easing in early 2023. The Treasury Department said he rose to nearly 3.50% in mid-June. 2-Yr. The Treasury said on Friday he closed at 3.23%, up a whopping 20 basis points (bps) from Wednesday’s close and up 34 bps from the last data point in July.

Monetary policy now works through private sector credit markets. In other words, the Fed, through its “forward guidance,” the dot plot and other public statements (Jobonning), has manipulated private sector interest rates to levels the Fed deems appropriate. In the middle of the week, several members of the Federal Open Market Committee (FOMC) took a hawkish move as it became clear that the Federal Reserve did not want the credit markets to move to lower interest rate levels. Public comments were made and interest rates began to rise as they argued. So even before Friday’s very bullish salary report, the bond market was dealing with increased volatility.

After that, Friday’s payroll report was released, and despite the fact that there are still six weeks until the next Fed meeting, including two CPI reports and another payroll report, the market is now optimistic that the Fed will It seems to be confident that it will work another 75 bps. Perhaps November and he will be even more in December. In fact, this seems to be what the Fed wants.


Nonetheless, the very strong July payroll data appears to be out of sync with all other data on labor market conditions. For example, his 30,000 increase in manufacturing employment contradicts a contraction in the purchasing manager’s her ISM manufacturing index. His 32,000 increase in construction jobs makes little sense given the sharp drop in new home sales and single-family home starts. A +22,000 rise in retail is a headache if retail sales volumes are flat to declining and retailers are overstocked and like Walmart.
, the US’s largest retailer, has announced layoffs. Also remember that the payroll report is biased upwards by the birth/death small business auto add-on. It could be +100K or more this month.

A sister survey, the Household Survey (ignoring media), rose +179,000 in July, mainly due to an increase in the number of farm workers. And that +179K still hasn’t made up for June’s negative -315K. Non-farm employment decreased by -112K. Household surveys also report full-time and part-time jobs, but they don’t show up on salary reports. Full-time jobs fell -71K in July. All growth is due to part-time work (+250K), not a statistic for the strength of the labor market.

The official “unemployment rate” (Technically bent U3) fell from 3.6% to 3.5%. This is largely due to the decline in the labor force participation rate (LFPR), i.e. the number of people who have jobs and the number who are actually working. Looking for a job. Again, it is difficult to reconcile the decline in the LFPR with the numerous articles and studies showing that many of those who took “early retirement” during the pandemic are now returning to the workforce. In one survey, 65% of those who returned to work said it was because of inflation, and 45% said it was because of a “bear market” in stocks. In addition, we have received reports that women with small children are also using the daycare center as it reopens.

Other employment data are less optimistic:

  • Weekly initial unemployment claims (IC) continue to rise, up +260,000 in the week ending July 30, up +6,000 from the previous week and up +94,000 from last spring’s lows. (see chart at the top of this blog).
  • Challenger, the company following the layoff announcement, said job cuts were +36% year-over-year. June and his July total increased above +58,000, and from February 2021 he is the highest two-month total since March.
  • Fed Chair Jerome Powell’s favorite JOLTS (Job Openings and Labor Turnover Survey) showed -605,000 job openings in June (latest data), with job openings down -343,000 in retail (a record plunge), leisure/ -91,000 in hospitality (down 3 of the last 4 months), -21K in manufacturing (after -201K in May) and -71K in construction.

So no – the latest payroll report doesn’t change our view of the recession! This single data point (+528K on the salary report) is more out of the ordinary, but in the hands of the “No Recession” crowd. I don’t think there is any political pressure here. Based on this single figure, the market now believes the Fed will raise rates by another 75 bps at his September meeting. As I said earlier, there’s still a month and a half before the Federal Reserve meets again, during which time he’ll have one jobs issue and he’ll have two inflation reports.

Other data

Incoming unemployment data remains weak:

Residential construction fell -1.6% M/M in June, the fastest decline since the beginning of the pandemic (April 2020)

  • Single-family construction: -3.1% (Jun); US homebuilder Pulte said orders for new homes fell -23% year-on-year.
  • Non-residential construction: -0.5% M/M Jun; -0.8% M/M May. This was widespread, with power, accommodation, transport, highway/street, and commercial sectors all negative. (Telecom and water are pluses.)


· University of Michigan Expectations Survey: In a previous blog, we discussed the U of M Consumer Sentiment Index and its recent historically low survey. As part of that process, the survey also asks about future expectations. When businesses hit a recession, they cut costs, reduce inventories, delay hiring, and prepare for recessions.

The trends in this index are: April: 62.5. May: 55.2; June: 47.5; July: 47.3. Note that June and July data are the lowest of any month preceding the last five recessions.

· The recent surge in credit card debt is also a concern. Arguably, consumers are just trying to maintain their standard of living. But credit balances can only increase so far before financial institutions say “enough.” According to a recent study by the New York Regional Fed, “…his cumulative 13% increase in credit card balances since Q2 2021 represents the largest increase in more than 20 years.”

· There is tension not only among US consumers, but also among consumers in other major economies around the world. The chart shows a sharp decline in consumer confidence in China and Europe. Sluggish consumption there will reduce US exports.


· The good news is that oil prices continue to fall. WTI (West Texas Intermediate – September delivery) closed at $88.53/bbl. On Friday (August 5), it was down more than -27% from its peak in early June ($122 a barrel). According to AAA, the price per gallon of regular gasoline he fell -18% from June 14 ($5.016) to August 5 ($4.113).

・According to the ISM manufacturing industry survey, the order/inventory ratio is at the lowest level since May 2020. Good news for production schedules. Backlogs have also weakened to their lowest level since July 2020, and supplier delays have fallen to pre-pandemic levels. The payment price index plunged for the first time in 11 years. Supply His chain of turmoil signs are fading. This is good news for the inflation outlook.

· The growth rate of the total amount of money is negative. When these are negative for any significant period of time, the economy will go into deflation, or at least disinflation. Also, with the Fed in QT mode (quantitative tightening – reducing portfolio bonds to remove reserves from the banking system), we expect aggregate currency growth to continue to be negative.

  • monetary base (Cash + Reserves): -1.9% m/m in Jun, negative monthly growth for 6th straight month, -8.6% y/y. The growth rate of this indicator reached 60% in 2020 and 30% in 2021. (Have you ever heard someone say “inflation”?) Growth in the monetary base was negative in January ’01 and December ’07. Remember what happened next?
  • M2 (Cash + Demand Deposits + Term Deposits): -0.1% m/m in Jun, negative for 2 of the last 3 months. The series has not seen a negative month in over 20 years. +12.9% YoY in July 2021.
  • M1 (Cash + Demand Deposits): -0.4% m/m in Jun, -2.9% p.a. over the last three months. On a Y/Y basis, this was +11% in March.

· Given the above, we are fairly optimistic that June’s consumer price index will peak.

final thoughts

Businesses across the country (and the world) are preparing for a recession. They confirm that productivity has fallen for two consecutive quarters, as has real GDP. So they’re looking to cut costs, right-size inventories, and stop hiring (and, in many cases, headcount at Walmart and the like). Such simultaneous actions by companies are rational for each company, but macroeconomically, they tend to invite and deepen recessions.

Midway through last week, the Federal Reserve appeared to be looking for an excuse to stop getting hawkish and assuming markets will turn around when a recession is fully realized. . They sent some FOMC members to put that sentiment in their jawbone. Employment (+528) might be an outlier, but it turns out to be the perfect excuse for the Fed to be hawkish. A recession is imminent, but they have a strong desire to keep the lagging indicator (CPI) down. Equity “bear market” tightening looks set to continue, negative real GDP growth for second consecutive quarter (Q3 also looks negative), aggregate currency growth negative (always a sign of economic slowdown). , a slump in all facets of employment (except one), and a bond market screaming “recession.” Talk about “tone deaf!”

The recession has already begun! Past Fed action can still be felt. A bumpy ride awaits.

(Joshua Barone contributed to this blog)

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