If you’ve never been to Orlando the first week of July, you are really missing out. If the entire country is having a heat wave, Orlando is the epicenter. In fact, the only thing hotter than Orlando is this can’t miss jobs market, ammiright?!?
This Week
- 10T: 4.28%
- German Bund: 2.53%
- 2T: 4.60%
- SOFR 5.33%
- Term SOFR 5.33%
- Fed Speeches
- Fed Chairman Powell – Fed has made quite a bit of progress on inflation but needs more confidence before cutting
- Fed Williams – Inflation job not done despite progress
- ADP Private Payrolls 150k vs.160k expected
- Non-Farm Payrolls 206k vs.190k but…you know…
- Unemployment rate 4.1% vs. 4.0%
Jobs
If you’ve been paying attention, you know that I feel like jobs, not inflation, will be the primary driver of rate cuts from here on out. Inflation is contained enough for the Fed to be on guard for Americans losing jobs. If inflation reaccelerates, it will take center stage again. Absent that, the Unemployment Rate is moving to the headlines.
We added 206k jobs last month. Well, at least until we revise it lower next month. The last two months were revised down by more than 50k each month but I’m sure the 206k is totally legit…
SMBC’s research team put out a cool graph showing how the consistent downward revisions are highly correlated to a recession.
Let’s beat a dead horse:
- Over 150k of the 206k were govt/healthcare
- 59k were birth/death adjustments
- The unemployment rate survey showed just 116k jobs added last month
- The UR is now 4.1%, the highest since the fall of 2021
- If the UR hits 4.2% next month, the well-known Sahm Rule is met (meaning we are already in a recession and just don’t know it…but she has been pretty active this year saying this time could be different)
- Unemployed workers are taking longer to find jobs
- Average hourly/weekly earnings slowed to 0.3%
Another cool graph from SMBC showing the private jobs less healthcare/social assistance. The headline numbers are not to be trusted…
CPI - Thursday
Powell testifies to Congress this week, Tuesday and Wednesday. CPI doesn’t come out until Thursday, increasing the likelihood of him sticking to the party line of needing more confidence that inflation is moving towards 2%. I would expect his testimony to be a snoozefest, although I’m sure a few totally uneducated representatives will attempt to look like tough guys as they grill him.
Below is the Cleveland Fed Inflation Nowcast. The top row is July’s forecast while the bottom row is June’s forecast – that’s what we get starting with this week’s CPI. Note how the forecast has inflation increasing next month. That’s not from inflation reaccelerating, but rather the base effect of measuring against a rapidly falling number a year ago.
Here’s the same table but with monthly data. Note how much more stable Core PCE is, still annualizing around 2.5%. While we get CPI this week, Core PCE won’t come out until Friday, July 26th. The Fed will have this data in hand ahead of its meeting on the 31st. Hopefully this time they can be bothered to factor the inflation data into their forecasts.
Inflation is stabilizing enough below 3% for the Fed to shift its focus to the labor market.
Everyone’s a tough guy until Americans start losing jobs…
Random Graph of the Week
Citi and Bloomberg each have a “Surprise Index” that tracks how the data comes out relative to the forecasts. The recent data has been missing expectations to a degree we haven’t seen in nearly 10 years.
Look how dramatically the Atlanta Fed’s GDPNow Q2 forecast has dropped in just a few weeks - from 3.1% to 1.7%. What caused the dramatic shift? Weak consumer spending.
Rates
Futures have a 72% chance of a cut in September and only a 3% chance of no cut by year end.
If Powell uses the month end FOMC meeting, or the August Jackson Hole summit, to signal rate cuts…cap prices are coming down finally.
For the T10, keep an eye on that 4.25% resistance level. Inflation this week, GDP next week, a Fed meeting at the end of the month…I think we’ll be testing 4% in the not-too-distant-future.
The Week Ahead
Big week ahead as Powell is scheduled to give his testimony to Congress on Tuesday and Wednesday. Later in the week we will receive CPI and PPI inflation data as well.
PPI doesn’t get the love that CPI gets, but it is highly correlated to Core PCE so Fed Funds futures markets may actually care more about that data point.
