We have been on the road 10 straight days, so you get a quasi-mailed in newsletter this week. For those of you that haven’t been, Orlando in July is a must. The happiest place on earth.
On a brighter note, we also had our second IPO! That’s Income Producing Offspring – a college grad with a job! From Orland to Charlotte to Chapel Hill to Indy to Milwaukee. Moved her into her apartment and sent her off. That’s better than ringing the bell at the NYSE and you can’t convince me otherwise.
Three hours into an 11 hour drive, we had one of the weakest job reports in years and rates are up 30bps over the last two weeks?! Markets are pricing in a nearly 100% probability of a hike in two weeks? Inflation is plunging and we are still hiking? The 49’ers are still popping off at the mouth like they didn’t give up 31 points.
Maybe the markets spent the week in the Orlando heat, too.
Last Week This Morning
- 10 Year Treasury at 3.84%
- German bund at 2.40%
- 2 Year Treasury at 4.90%
- SOFR at 5.06%
- Term SOFR at 5.14%
- Nonfarm payrolls came in at 209k vs 225k expected
- Unemployment rate came in at 3.6% as expected
- Average hourly earnings MoM came in at 0.4% vs 0.3% expected
- Average hourly earnings YoY came in at 4.4% vs 4.2% expected
- ADP employment change came in at 497k vs 228k expected
- JOLTs job openings dropped 500k but who cares because there’s still more job openings than any time in the history of the universe and the job market is the hottest ever and there are 15 perfectly fulfilling jobs for every American and this is the most statistically solid data point the BLS tracks
Weakest Job Report Since December 2020
The ADP job report came out Wednesday, showing a gain of nearly 500k jobs. Rates spiked, and not just front-end rates. The 10T broke 3.92% and, a few minutes later, 4.0%.
It didn’t matter that Friday’s numbers from the real report showed a gain of 209k. The 3 month average is nearly 200k less per month than a year ago. Nor did it matter that the JOLTS survey showed 500k fewer job openings than last month (not to mention the response rate to the survey is at an all-time low of 31%...who is more likely to respond, those with openings or those without openings?).
Markets have a 93% probability of a rate hike on the 26, which would push the upper bound to 5.50%. Odds of a hike in September as well are just 26%, so the ADP mostly impacted this month’s meeting.
This pushed cap prices to a new cycle high. This is brutal. I pinky swear promise, when the Fed finally pauses for good, cap prices will come down.
I think 93% is too high because we get CPI and PPI this week. You know, the whole reason the Fed is hiking in the first place. Headline CPI is expected to fall from 4.0% to 3.1% and we’re talking more hikes?
And what if it comes in with a 2 handle? Duke Econ Professor Dr Cam Harvey was on CNBC last week predicting the shelter component would finally start hitting the data this month and CPI will come in at 2.7%.
If that happens, are the odds of a hike still 93%?
We’ve seen headline inflation drop 6% in a year and the shelter component is only just now starting to show up in the data? Isn’t that a giant win? And doesn’t that suggest it should continue decelerating?
Powell was spotted at a Grateful Dead concert a few weeks ago, but I’m not sure he’s giving off Jerry Garcia vibes.
Powell should be easing into a mellow jam session hippie mood, but instead is going full Rage Against the Machine. Turns out the internet doesn’t have any good memes for Rage, so I had to comingle my memes and pivot to Kylo Ren. As a friendly reminder, CPI was 9.1% a year ago and Powell is like…
“But Jay, the Fed’s new measure of financial conditions showed the tightest level since the GFC..”
“But seriously, Friday’s jobs report showed the fewest jobs gained since December 2020…”
And let’s not forget PPI, which has fallen off a cliff. PPI is generally considered a better leading indicator because they come earlier in the supply chain. A year ago, headline PPI was 11.2%. Wednesday it is forecasted to come in at 0.4%. That’s not a typo – nearly 0%.
Yes, I know Core inflation matters more to the Fed, but that’s improving as well. Nine months ago, Core CPI was 6.6% and Wednesday it is forecasted to come in at 5.0%.
How about Core PPI? One year ago, it was 8.3%. Wednesday’s forecast is for 2.6%.
Are we 93% sure we need another hike?
And if a hike this month show up a year from now, what are we talking about here?
There’s a lot of Fed speeches this week to help the market dial in those expectations, but most of the speeches are before Wednesday’s data so I’m not sure a cooler than expected inflation report will change their speeches.
A large reason why markets (and yours truly) have been so skeptical of a soft landing is that the Fed has no track record of knowing when to quit. They overdo it, then have to correct massively. The more they keep hiking in the face of a dramatically slowing economy, the more likely they are to repeat the mistakes of the past.
Rates
The 2 Year Treasury hit a 16 year high (5.00%) as markets priced in one more hike and delayed cuts even further.
I’m stunned the 10T broke the key level of 3.92%, jumping 20bps in one day once it breached. It’s important to note that it didn’t break higher because of one more hike. Markets are increasing the odds of a soft landing. The longer it stays above 3.92%, the more likely that becomes the new floor and 4.25% is the next stop.
Alternatively, we may see it push back below 3.92% by the end of the week depending on the inflation reports.
Week Ahead
Following the interesting job data last week, markets will be paying attention to Fed speak this week before turning attention to CPI and PPI.
