Last Week This Morning
Resilient? Or Just Premature?
“The job market is showing incredible resiliency in the face of aggressive rate hikes!” – basically every financial commentator and economist.
Yawn - call me back in 6 months.
Companies that have been trying to lure labor off couches sidelines for two years don’t suddenly stop just because the Fed has hiked rates. It will take a while for the effect of these hikes to hit labor.
Listen, it is a good number. I’m just saying these wheels were set into motion a long time ago. And hiring is slowing. This was the slowest quarterly average since Q4 2020.
2021
Q1: 644k
Q2: 422k
Q3: 543k
Q4: 637k
2022
Q1: 539k
Q2: 375k
We’re still 500k+ below pre-covid levels and even further behind where we should be absent the pandemic. Total job openings fell by 427k, the biggest decline since covid hit.
This feels like a natural slowing rather than a falling off the cliff, so that part is good. But hiring doesn’t behave as violently as something like stocks anyway, so I don’t see why economists are so happy about this number.
This number does pave the way for another 75bps hike on July 27th, although this week’s CPI is a much bigger factor in that. Speaking of which…
A Big Week for Inflation
Powell has said wage inflation is his top priority. Friday’s job report showed that Average Hourly Earnings (cough cough wage inflation) rose by 0.3% last month, which is quite a bit lower than January’s 0.6%. This is a win.
Unfortunately, that won’t have any impact on Tuesday’s CPI report. It’s incredibly likely that headline inflation will be up again, driven in large part by energy prices. Mid-June had oil futures at $120+ and the recent plunge towards $100 won’t show up in this week’s numbers.
Last month, headline CPI came in at 8.6%, a 40 year high. The consensus this month is higher still, 8.8%.
Stripping out food and energy, aka “core” inflation, and the outlook is actually decent. Last month showed Core CPI at 6.0% and is forecasted this month at 5.7%.
Keep an eye on the monthly numbers. All the newspaper headlines will be about the 8.8% level, but the Fed will be more closely watching the month to month trend. Headline CPI m/m is expected to increase from 1.0% to 1.1%, while Core is expected to hold steady at 0.6%. Deviations from expectations could shift markets.
PPI, which measures inflationary pressures before it gets to the consumers, could remain in double digits.
As if all that weren’t enough, inflation expectations come out Friday. In many ways, this is more important to the Fed than current inflation.
There is little doubt the headlines will be screaming about rampant inflation, but the Fed is going to be looking at other measures to see if it’s showing any signs of cooling off. That, in turn, will dictate whether markets price in 50bps or 75bps at the September 21st meeting.
The July 27th meetings is a done deal – 75bps. Even if inflation shows signs of cooling, the market is pricing in 75bps so the Fed will take advantage of that permissions slip.
SOFR will be around 2.30% by month end.
Rates
The front end is back above 3.0%, with futures markets putting peak SOFR at 3.50%. I hate to say it, but 4.0% within the next six months isn’t off the table, particularly if the monthly number show continued acceleration.
The market is now pricing in rate cuts starting in June of next year. I know its tough to get a loan right now and this is really far down the priority list, but any floors included in term sheets could have a lot of value in about a year. Just remember I said that when you have more leverage in six months.
The 10T seems very range-bound, with 3.0%-3.25% the current range. Paradoxically, an inflation surprise to the upside could push 2yr rates above 3.25%, but depress the 10T even further. The market’s take will be, “the Fed is going to have to inflict even more pain and the resulting fallout will be even worse.” The 10T falls.
At this point, the 10T needs cooling inflation to have room to jump. This is unlikely to be the week that happens. Expect more range-bound behavior.
Week Ahead
In addition to the inflation data, we also get Retail Sales. This is crucial since consumer spending is 2/3rds of GDP.
Buckle up – caps are going to have an even more volatile week.