Daily Economic Update: August 5, 2024

Friday's jobs number disappointed markets, leading to major declines in yields and equity indexes. Is the recession that has been forecast for going on 2-3 years finally upon us?  The narrative is currently centered around the Fed being late to cut and how they'll now need to cut aggressively to stave off recession.  Some are even calling for an inter-meeting cut.  Are we really at that stage after this jobs report?  It's a very Fed-centric narrative to say the least. 

You'll hear plenty more talk about the Sahm rule being triggered and whether that will lead to recession, or according to Sahm, maybe not as this triggering is not caused by people losing jobs vs. an increase in the labor force.  I'll let economist figure out whether that matters.  

What else do we have out there, oh yeah, unwind of Yen carry trades, see USD:JPY back at 145, remember 160?  Tough to be short Yen with that move and you might be forced to sell whatever assets you were financing with the Yen short.  Anyway, Japanese markets looking rough at the time of this writing.  Remember back in January when the Japanese stock market hit a 34 year high finally reclaiming it's 1989 level, no you don't.  But I wrote about it here.  Hopefully it doesn't take another 34 years to reclaim the recent highs, but it's been a violent move lower over there.

Other narratives, Buffett selling Apple, that's apparently not bullish for tech stocks.

Let's also not forget about tensions in the Middle East and whatever narratives we have around domestic politics as the U.S. Presidential race tightens.

On the week ahead it's a little light with ISM Services.  It will be interesting to see how officials from the all powerful Fed talk about the Jobs report and the rate cuts the market have quickly priced in.

Monday: Goolsbee, ISM Services, Daly

Tuesday:  trade data, 3Y Auction

Wednesday: take the morning off, come in for the 10Y Auction

Thursday: jobless claims, Barkin

Friday: take another day off

XTOD: This is the biggest market decline since the last decline you don't remember or care about anymore.

XTOD: Interestingly, most of Friday's bond easing was to inflation breakevens. The nominal 10Y yield fell 19bps, but the 10Y TIPS only fell 3bps. The 5Y was a qualitatively similar story.

XTOD: “History never repeats itself. Man always does.”   - Voltaire 

We are in that part of the market cycle where all past corporate governance misdeeds are being overlooked and stocks of promoters who are promising multi-year high growth guidance inspite of negative OCF are soaring.

XTOD:  As of today, it appears as though we are headed into a recession.   You know what is going to get smeared in a recession?   Private equity.   Low exits are going to no exits. Then what? More to say on this in the coming days. Enjoy your weekend.

XTOD: The whole marketplace is pricing exceptionally high probability rates are going down by a lot - which is just consistent with recession pattern. Rate cuts don't do anything (pure superstition) so the higher unemployment goes the lower the Fed will go chasing it.

XTOD:  Your paycheck is the drug that makes you forget about your goals and passions.

Daily Economic Update: August 2, 2024

Jobs Day in 'merica.  The street is expecting headline job gains of ~185K with the unemployment rate holding at 4.1%.  Of course you'll hear all about the effect of things like seasonality, immigration, hurricane Beryl and plenty about how many jobs were in government.  While reviewing the data, remember the headline number comes from CES/Establishment Survey while the labor force participation rate and unemployment rate comes from census data, feel free to read a few articles on how immigration may impact employment data.  A summer Friday, with rate cut speculation heightened against a backdrop of perceived recession risk, political and geopolitical considerations being repriced, could make for interesting market reactions to this report.

August started with a big down day for equities. After hours Intel got smoked and AMZN was down, while Apple was up. Yields also fell double digits again yesterday, with the 10Y breaches 4% for the first time since Feb.  The catalysts include fallouts from yesterday's FOMC, perhaps the "hawkish" BoE rate cut, weaker than expected ISM Mfg, higher than expected jobless claims, positioning ahead of today's Jobs numbers and likely some of the heightened geopolitical risk.  The 2Y is at 4.16% whil the 10Y is at 3.98%.  

XTOD: Past 3 weeks:

-NATO summit

-Attempted Trump assassination

-RNC + Vance VP pick

-Biden stepping down

-Harris becoming Dem nominee

-Netanyahu visit 

-VZ elections

-Hamas/Hezbollah assassinations

-Plea deal for 9/11 attackers

-Biggest prisoner swap deal w/ Russia since Cold War

XTOD: poor guy, we've all been there https://pbs.twimg.com/media/GT54BiDWUAAHw1D?format=jpg&name=900x900

XTOD: Joe Rogan suggests Kamala Harris will win the 2024 election, says "people are giving into the bullsh*t."  Rogan pointed to the media's PR work for Harris and argued that their strategy is working. 

"She’s gonna win," Rogan said to Michael Malice who disagreed.   "Everybody forever was like, 'Kamala Harris is the worst vice president.'"  "She’s the least popular vice president of all time, and then in a moment in time, all of a sudden she’s our solution. She’s our hero."   "[Now], everybody’s with her. All these social media posts about her. Try Googling a negative story on her, you won’t find one."  

"I feel like we are in this very bizarre time where people are giving into the bullsh*t in a way that I never suspected people would before."   "They're willing to gaslight themselves." 

"I’m saying it because she could [win]. I’m not saying it because I think she’s going to and I’m not saying it because I want her to. I’m just being honest. I could see her winning."

XTOD: The S&P 500 withstood a sell-off in tech to end July 1.13% higher than at the start of the month. With the 10-year rate dropping to 4.09%, the ERP for the index stands at 4.12% and the expected return on stocks is 8.21%. http://Damodaran.com

XTOD: Signs point to the upper-limit being reached for what consumers will spend before looking for alternatives, leading to price pushback hurting company profits.  “Top White House economist Jared Bernstein told a room of researchers and reporters Tuesday that price sensitivity would help complete inflation's ‘round trip’ — that is, bring it back to pre-pandemic norms.”

XTOD: We have the meme of the year:  At the Olympics shooting, everyone is wearing ear protection, lenses, glasses, and futuristic gear  Then he arrives from Turkey, 51 years old, with a t-shirt, hands in his pockets, a serene look, and wins the silver medal 🥈 Unlocking a new level

XTOD: “Show up every single day and do the work.”  - Kobe Bryant  https://x.com/i/status/1818299747154923658

XTOD: The top 10% of alcohol drinkers in the US consume 74 drinks per week.
[forbes.com/sites/trevorbu… This article does a good job of explaining the flawed methodology of the study that generated this implausible data. It was based on self-reported data (which is unreliable) and multiplied responses uniformly by 1.9. ]

Daily Economic Update: August 1, 2024

It now feels lost in the shuffle, the BOJ raised its policy rate to 0.25% and also laid out a further tapering of their bond buying program.  Governor Ueda also set up the possibility of further rate hikes at the coming meetings. The Yen liked the rate hike, rallying strongly as the market hadn't fully priced in the hike.  USD:JPY back under 150. 

You can find my FOMC recap by navigating this blog, I believe in you. Most everyone seems to believe Powell is positioning for a September cut.  As an aside, it will be funny when the Fed cuts 3x this year and they’re like “see just like we projected at the start of the year”.   Bond yields fell following the FOMC presser with the 10Y now at 4.06% and the 2Y down to 4.27%.  Remember when we were in the 3.80s on the 10Y at the start of the year?  Stocks did what stocks do, rising as we all believe in AI (thanks META) and rate cuts again. NVDA reportedly added $329 billion in market cap...cool.

In other data the employment cost index rose by less than expected, ADP employment was lower than expected and in the EU inflation was higher than expected.

Also lost in the shuffle of Fed day is rising risk in the Middle East.

On the day ahead it's BoE, Jobless Claims and ISM Mfg.

XTOD: Jay Powell appears to say: another near-quarter of data telling us that the macroeconomy is normalizing, and we at the Federal Reserve will start to normalize interest rates and the yield curve. But another quarter of normalizing data will produce a macroeconomy that is...well, normal. And policy should normalize in step with the economy, not lag behind—that guarantees a complex root in the dynamic equation, hence pointless disruptive stop-go cycles. And what would a “normal” yield curve look like today, anyway?

XTOD: Fed: We decided to take our chances waiting to cut rates cause our jobs are not at risk, only yours are. No seriously, if they get this wrong again not one of them will get fired.

Nobody got fired for the GFC or transitory.

The only ones that had to leave against their will by "retiring" were the ones caught insider trading.

XTOD: REMINDER: Anytime the media quotes a poll, or a prediction market, or a survey -- without simultaneously disclosing the prior track record of that item over the past few election cycles -- they are committing journalistic malpractice...

XTOD: Since 2022, $META revenue up 40% yet # of employees down 19% despite massive new investments in AI.  AI is not only extending and accelerating Meta revenue growth, it is also leading to big leverage on people / opex.  

XTOD: Israel has sent Diplomatic Back-Channel Messages to both Iran and Lebanon, stating that they are willing to go to Full-Scale War if Iran, Hezbollah, and other Iranian-Backed Groups conduct a Retaliatory Response which causes Significant Damage and Casualties in Israel.

XTOD: High draft pick. Doesn’t seem that good. Still a big time player despite not being that good. Gets to the big stage and goes on a heater of a lifetime to take down the Bob Kraft supported overwhelming favorite. Turns out they’re pretty good if not great. Kamala is Eli Manning.

XTOD: "I believe in maximum flexibility, so I reserve the right to change my position on any subject when the external environment relating to any topic changes too." --- Henry Singleton

FOMC Recap: FOMC Trade Deadline Edition

• The Fed held their policy rate target range at 5.25% to 5.50% as expected
• The FOMC Statement made changes to indicate a moderation in the employment picture and a slowing in the inflation picture. Noting that they are attentive to risks to both sides of their dual mandate.
• Powell said the FOMC does not making policy decisions based on an outcome of elections that haven't happened yet.

With the MLB trade deadline passing on Tuesday, the FOMC faced their own decision deadline today. Like MLB GM's, FOMC officials know the importance of making decisions with their goals in mind.  In the case of a MLB GM the pinnacle goal is winning the World Series.  For the Fed the pinnacle goals are low and stable inflation, maximum employment and moderate long-term interest rates, or more generally stated, fostering economic health.  

Every FOMC meeting is like the MLB trade deadline.  Just as MLB GM's need to decide whether to add or subtract to small parts of their roster or to wholesale change direction, the FOMC needs to decide what to add or remove from their statement, whether to do more or less of something they are currently doing with their policy tools, or in times of crisis deciding to do something they've never done before.  Like MLB GM's and all of us, the FOMC is making their decisions with their goals in mind, trying to face reality as it is, and prudently balancing going for it now against the risk of harming the future.  MLB GM's and FOMC officials face the added task of communicating their decisions to the public in a way that manages expectations.

There is often a realization that what got the team to where they are today won't get them to where they want to be, that when things stop evolving they stop compounding.  Every coach and manager knows that small decisions can lead to big results, especially when those decisions lead to actions that are able to use time to compound (long and variable lags anyone?).  They also know that bad decisions can compound in a negative way.  

While MLB executives would like to believe they have one goal or priority, which is winning a championship, the reality for some (most) franchises is they have a dual or multiple mandates, like the FOMC, and have to balance competing priorities that can often be in tension.  In many cases we have to prioritize one goal over another.  In the words of Greg McKeown:

"The word priority came into the English language in the 1400s. It was singular. It meant the very first or prior thing. It stayed singular for the next five hundred years. Only in the 1900s did we pluralize the term and start talking about priorities."

Further it was once written (you can find it, but I won't bias it):

"No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. " 

I'm no Fed sympathizer, but the decisions the Fed has to make are hard. The decisions we all make are made under uncertainty and hard.

The decision by the FOMC today to make statement changes reflects the reality of the recent economic data they have consumed since the last meeting.  By not making any change to the policy rate today, the committee feels that progress toward their goals remains on a path they find acceptable.

It's hard to know exactly what questions the committee asked themselves as they made their decisions, but hopefully they collectively reached their decision based on their honest assessment of the state of the economy, without interference of political or external pressures, in a state where they were less concerned with their personal futures, uninfluenced by past criticisms, and more concerned with recognizing their decisions impact a complex ecosystem and need to be made with an eye toward protecting the people from undue harm from their decisions.  That is probably good a lens to make any decision (you can find many of these principles embedded in Charlie Munger's investment decision making).

The modern world loves to cling to a belief that everything can be controlled. There is probably a hefty "illusion of control" we place in the Fed, despite the fact that macro-forecasting is impossible (see Howard Mark's last memo).  Perhaps Powell said it best today:

"Certainty is not a word we have in our business".

Rather than be anxious to find certainty from the FOMC, perhaps we should rejoice that it is uncertainty that sets us free.  The best we can hope for out of the Fed is sound decision making guided by principled questions.

Daily Economic Update: July 31, 2024

Month-end meets central banks with the BOJ overnight and the FOMC in the afternoon.  Yesterday's data started with a EU GDP data beat, though German growth was negative while their inflation was above estimates.  Stateside the JOLTS data showed jobs openings above estimates but measures of labor turnover in terms of quits, layoffs and hiring were below pre-pandemic levels.  The low level of quits may be a sign that employees no longer are seeing higher bids for their services away from their current employer.

The Conference Board's Consumer Confidence Index survey showed consumers still hate inflation and perhaps this commentary lines up with the JOLTS data: “Compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead. Meanwhile, consumers were a bit less positive about current labor and business conditions. Potentially, smaller monthly job additions are weighing on consumers’ assessment of current job availability: while still quite strong, consumers’ assessment of the current labor market situation declined to its lowest level since March 2021.”

Likely more important than data were the Israeli airstrike in Beruit which killed a Hezbollah commander who reportedly had planned the attack that killed 12 in Isreal's Golan Heights.  The possibility of an expanding middle-east conflict may lead to further risk-off.   Add U.S. airstrikes in Iraq to the list of mid-east risk.  And let's not forget Elon vs. Venezuela. 

After hours MSFT was down after earnings dissappointed in their cloud business. 

On the day ahead we'll see if the FOMC provides any better sense on the likelihood of a September rate cut.  I might write a FOMC Recap, I might not. 

XTOD: BREAKING: The Magnificent 7 stocks have now erased a combined $2.6 TRILLION of market cap over the last 20 days.  That's an average of $125 billion of market cap PER DAY for 20 days sight.  Nvidia, $NVDA, alone has erased over $1 trillion in market cap since its high seen one month ago.  In other words, the Magnificent 7 have lost as much value as Nvidia's ENTIRE current market cap in 20 days.  That's also $200 billion more than every stock in Germany's stock market combined. 

What happened to big tech?

XTOD: The new labor market spider chart published by the @AtlantaFed   today shows a striking divergence between the private job openings rate and the private hires rate.Turnover (as measured by employee quit rates) has fallen YoY in all sectors, and is now lower than the 2015-2019 average rate in half of major sectors

XTOD: “Go for the pain of discipline because it weighs ounces. The pain of regret weighs tons.”  ~ Jim Rohn

XTOD: "You can either lower your goals to match your effort, or you can raise your effort to match your goals." (Coach K)

XTOD: Stop efficiently running meetings you shouldn't be holding at all.

Daily Economic Update: July 30, 2024

Equities rose ahead of central banks and tech earnings.  Treasury financing estimates showed the TGA will be drawn down to $700bln by 4Q and estimated borrowing is down slightly due to QT in Q3 and spending in Q4.  We get the mix of bills and bonds on Wednesday.  The 10Y yield was back under 4.20 and at 4.17% and the 2Y was at 4.39%.

The Fed isn't going to cut at this meeting, but nonetheless between now and the FOMC you'll hear plenty of arguments from those favoring cuts now and those opposed.  Camp "cut now" does have a lot of overlap with "team transitory" but it's not the exact same group. I'll try my best to summarize and over generalize the two views which you likely know already:

Team Rate Cut: we already have inflation coming back to target, given estimates of short and long-run neutral rates (r-star) policy is far too restrictive. The balance of risk is now skewed so far towards risking a recession that we need to cut now.

Team No Cut: inflation continuing to run above 2%, labor is not that weak, overall financial conditions remain quite loose (have you seen all-time highs in stocks? have you seen tight credit spreads?).  Quitting too soon risk a reacceleration of inflation.

Irrespective of where you might stand, it's interesting to wonder how much additional debate and frankly wasted energy has been caused by the Fed's forward guidance, by the constant appearances, and by a system of their own creation that has conditioned market participants to believe in two things: 1) the first cut will likely be the first of many and 2) the first cut is important in the sense that it means something like "we won the inflation fight and are now fighting to prevent recession". 

Overall market expectations for the Fed are that they'll note the progress in the fight against inflation, that risks in their dual mandate are balanced and that they don't need to see much more evidence on the inflation side before a cut. 

On the day ahead it's home prices and JOLTS.

XTOD: The eagle has soft landed. The New York Fed’s measure of underlying inflation is now just 2.06 percent. The Fed should cut rates now now now.

XTOD: Buy private equity into a Kamala Harris administration. 

XTOD: Blackstone President Jon Gray put out a video last week with a bullish view on commercial/multifamily real estate (sans office) and pointing toward more acquisitions in coming months. Some highlights:

"At the beginning of the year, we said real estate values were bottoming. And I would say now, six months later, after it’s pretty clear from the data that that’s occurred, we’d say real estate values are recovering – really with the exception of office buildings."

"We continue to see the cost of capital come down, and we’ve seen greater availability of debt."

"We’re seeing a sharp decline in new supply, and that of course creates a foundation for the recovery as well. We really think this is a good time to be investing capital. We’ve been doing it for the last six months in real estate, and I expect you’ll see a lot in the back half of the year as well."

XTOD: Hang around people who work hard, they will probably rub off on you. Hang around people who complain and hate, you will end up doing the same. Hang with individuals who talk about growth, you will develop the same mindset. Moral of the story? Check your circle. That’s your future.

XTOD: People wish for other people’s lives but not for their sacrifices. 

We wish for the prize but not for the price.

Daily Economic Update: July 29, 2024

It's like the olympics of central bank meetings this week with 3 central bank meetings (FOMC, BOJ and BoE).  Of the 3 CB's, the most interesting might be Japan, where a rate hike could still be in the cards.  The BoE and Fed are likely on hold, but BoE has decent odds towards a cut.   Friday's PCE data was largely in line with expectations and markets seemed to like the fact that Personal Income was lower than expected, so let's cheer people making less because it increases the chance the Fed cuts? Is that the narrative?

With Jobs Day on Friday, I thought I would reflect on how last week everyone was worried about recession because of rising unemployment.  Then Claudia Sahm of the Sahm rule wrote a lot of words that I think said, the rule is sending the right signals in terms of risk of recession, but it's complicated.  Got it!   And Goldman research said we shouldn't be too concerned with the rise in unemployment because in part (they had 3 reasons: (1)there haven't been layoffs (2) the Fed has plenty of room to cut and (3) there are temporary labor frictions) because people aren't losing their jobs:

"First, the recent rise in the unemployment rate breaks with the historical pattern in one crucial respect—there has not been an increase in the layoff rate, which remains historically low. This is important because it means the economy is not experiencing the usual vicious circle in which job and income loss lead laid-off workers to reduce their spending, leading to further job loss. The increase in the unemployment rate has instead come partly from a surge in labor supply driven by immigration, with which job growth has not quite kept up. But job growth is far from weak, and with final demand still growing at a robust pace, it appears set to remain fairly solid.

Overall economists as usual don't know and this time immigration is clouding the employment picture.

In the words of Vanguard founder John C. Bogle from his book "Enough.":

"Today, in our society, in economics, and in finance, we place far too much trust in numbers. Numbers are not reality. At best they are a pale reflection of reality. At worst they're a gross distortion of the truths we seek to measure.  But the damage doesn't stop there....By worshipping at the altar of numbers and by discounting the immeasurable, we have in effect created a numeric economy that can easily undermine the real one."

Internationally we have Israeli striking Hezbollah following a Hezbollah missile strike that hit a soccer field in Israel.  The rising tensions between Israel and Hezbollah in Lebanon risk expansion of conflict in the Middle East.  We also have a crazy story of two Mexican narco lords, one of the sons of El Chapo and the other known as 'El Mayo', were arrested in Texas.

On the week ahead the big U.S. data is FOMC and Jobs, but there are plenty of "important" data releases throughout. We also get more mega-cap tech earnings from 4 of the Mag 7 (Apple, Amazon, Microsoft and Meta).  

Monday: recover from the weekend and prep yourself for having to listen to pundits talk all week about central banks and jobs

Tuesday: Home Prices and JOLTS

Wednesday: BOJ (overnight) FOMC at 2pm before that ADP Employment

Thursday: BoE, Jobless Claims, ISM Mfg

Friday: Jobs Day, factory orders

XTOD: The Biden Administration is concerned that the Hezbollah Rocket Attack earlier on a Youth Soccer Match in the Town of Majdal Shams, could be the Spark which leads to an All-Out War against Hezbollah; with a Senior U.S. Official telling Axios, “What happened today could be the Trigger we have been worried about and tried to avoid for 10 Months.”

XTOD: A  disingenuous take is when someone predicting economic collapse says "I hope I'm wrong, I would love to be proven wrong here."  Of course there are some very smart pessimists but I think some fantasize about economic collapse because in a world where everyone is suffering they would feel better about themselves by comparison.

XTOD: Macro view

Financial conditions are NOT restrictive 

Growth will bounce

Inflation will stick at to high levels

Earnings estimates for 2025 will not be realized 

Fed won't cut in 2024

Treasury is stuck and will be forced to up coupon issuance

Long term bonds have no upside 

Equities are stupid rich

Positioning remains massively overweight long by long only and hedge fund shorts are moderate

XTOD: Today’s PCE report on inflation and spending was already baked into yesterday’s GDP report. They showed an economy, where discounting is luring consumers to open their wallets a little further, especially for big ticket items that often require financing.  

Still, there were new data in the report. Spending outpaced personal disposable incomes, and the saving rate fell to its lowest rate since December 2022. Consumers are leveraging home equity and other lines of credit to pick up their spending on everything at appliances, furniture and building material and garden stores. Much of those gains were in higher income households as those at the lowest rungs of the income strata have tapped the saving they amassed during the pandemic and then some.

XTOD: Teen Allegedly Derailed BNSF Freight Train For "Insane" YouTube Footage

Daily Economic Update: July 26, 2024

Summer Friday PCE data day.  What if PCE data for some reason is hot and market expectations for rate hikes are again repriced into further out in the future?

Stock narratives include: a tech re-rating around returns to AI, an unwind of Yen carry trades ahead of an expected BoJ hike, a potential slowing economy (the Dudley editorial) and political risk.  Ford shares were particularily hit hard citing warranty cost. Overall it was an up and down day in equities with S&P ending in a loss and Nasdaq down again.

In data GDP beat big,  coming in at 2.8% vs. 2.0% est. with higher than expected demand and higher PCE, but no one cared.  Durable goods orders were weak but seemed to be driven by airline orders and jobless claims continue to be super low.  The 7Y auction was solid, but yields rose from lows of day.  The 2Y ended at 4.43% and the 10Y at 4.24%.

PCE will be the headline today.

XTOD: Never mind GDP – the real shocker in the data today was the core PCE deflator (+2.9% SAAR in Q2 vs consensus views of +2.7%). Unless prior revisions were the culprit, the quarterly data suggest that the June core deflator will move in the opposite direction tomorrow as the CPI did – the risk now is +0.3% MoM (consensus at +0.2%).  This could well complicate the near-universal view that the Fed will start cutting rates by the Fall.

XTOD: This is your reminder that the Fed won't cut rates next week and won't cut rates by 50bp in September. My view remains they won't cut rates in September either fwiw.

XTOD: In case anyone doubted the role of carry trades on $NDX, here’s $JPY vs $NQ for the past 13 days:  https://pbs.twimg.com/media/GTWXSyRXIAANyD1?format=jpg&name=900x900

XTOD: “Beauty awakens the soul to act.”      ― Dante Alighieri

XTOD: “In a life properly lived, you’re a river. You touch things lightly or deeply; you move along because life herself moves, and you can’t stop it; you can’t figure out a banal game plan applicable to all situations; you just have to go with the ‘beingness’ of life.”   - Jim Harrison

XTOD: Charlie Munger: "The toxic people who are trying to fool you or lie to you — who aren't reliable in meeting their commitments — the great lesson of life is [to] get them the hell out of your life. And do it fast."