Taking the jolt out of JOLTS
May 29, 2022 -weekly comment
**********************************
Powell constantly talks about how strong the labor market is. A Fed goal is to curtail that strength. Here’s a snippet from Powell at the May press conference:
“There are 1.9 vacancies for every unemployed person, 11.5 million vacancies [JOLTS out on Wed] 6 million unemployed people. So we haven’t been in that place on the vacancy, sort of the vacancy/unemployed curve, the Beveridge curve. We haven’t been at that sort of a ratio in the modern era. So in principle, it seems as though by moderating demand, we could see vacancies come down and, as a result – and they could come down fairly significantly, and I think, put supply and demand at least closer together than they are. And that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”
That’s a heck of an opening. We want to get demand down without slowing the economy. Huh?
Here’s a clip from the minutes of that meeting:
Viewed over a longer time horizon, financial conditions, as measured by many financial conditions indexes, had tightened by historically large amounts since the beginning of the year.
Market- and survey-based measures of U.S. inflation expectations continued to project a significant deceleration in inflation in the coming years. Nonetheless, far-forward inflation compensation rose over the period, and market participants remained attentive to the risk that, in bringing inflation back to 2 percent, the Committee would need to tighten by more than currently expected.
I saw several recent articles noting employment deceleration including a May 9 CNBC piece highlighting an email from CEO Khosrowshahi that said UBER will now “…treat hiring as a privilege and be deliberate about when and where we add headcount.” Another story on BBG says MSFT “…will slow hiring in its Windows and Office divisions as well as the Teams chat and conferencing software groups.”
There’s a piece by Piper Sandler featured on ZeroHedge which outlines many more job cuts, with this summary. (link at bottom)
Here are the stunning implications according to Piper Sandler:
- We could see a million layoffs or more, as many goods sectors that benefited from the pandemic now realize they added too much capacity (as involuntary admissions make clear).
- Low-income workers – who enjoyed the hottest wage gains during the crisis – are now most at risk of layoffs, with remaining job holders to see much slower wage growth.
- Payrolls gains are poised to downshift to just 100k/month on average in the second half of the year, from about 515k/month through April.
Obviously a lot of stimulus-induced hiring occurred on the pretext of buying market share and hopefully growing into profitability. The ‘historically large’ amount of tightening in financial conditions has created an abrupt halt in the largesse of capital markets, and with it, a change in the jobs outlook. The employment report is Friday, with NFP expected 325k. ISM Mfg and JOLTS on Wednesday. Waller speaks Monday, Bullard on Wednesday and Mester on Thursday. Next FOMC is June 15, in two and a half weeks.
Financial conditions have actually eased somewhat In the past couple of weeks. The low settle in EDM3 was 9634.5 on May 3 and it settled 9682.5 on Friday, a change of nearly 50 bps. Tens topped at 3.13% on May 6 and on Friday ended at 2.74%. The dollar index topped May 12 at 104.85 versus 101.67 on Friday. SPX belatedly followed fx and rate signals, and had a nice bounce off the 20% pullback. (Halfway back from the year’s range is 4315; Friday’s close was 4158). The muni market thawed; a BBG story noted: Muni Mkt Posts ‘Stunning 180’ in Biggest Rally Since 2020. Hi-yield HYG and JNK etfs exploded higher. Implied vol in treasuries is falling.
Bostic floated the idea of a September “pause’ in rate hikes. Bullard opened the prospect of cutting rates in 2023 or 2024 if inflation is brought under control.
The problem of course, is that food and energy prices continue to rise, another major factor crimping demand for other goods and services. For example, July Soybeans and WTI (CLN2) both settled at new contract highs, 1732 ¼ and 115.07. In any case, EDM3 has been the lowest priced contract (highest yield) on the strip for quite some time. The same is true on the SOFR curve with SFRM3. However, last week, EDH3/EDM3 spread had a low settle of 0.5 and SFRH3/M3 actually settled zero on Wednesday and Thursday. By Friday, these spreads were +2.5 and +2.0. The point is that the market is slowly adjusting the timetable for the end of Fed hikes closer in time…more like Q1 of next year rather than Q2. That is, we are close to seeing March’23 contracts take over as the lowest priced on the strips, with deferred contracts leaning toward an ease in policy. In fact, FFQ2 (August Fed Fund contract) settled 9819.0 or 1.81%, just a whisper below the generally accepted idea of two 50 bp hikes in June and July (which would put the Fed Effective rate at 1.83%).
The question now is whether supply issues continue to dominate — with attendant price increases, or whether the Fed’s impending hikes will sap demand enough to stifle employment and inflation. The market is beginning to lean toward the latter outcome, which will tend to steepen the curve, but probably will NOT provide a continued tailwind for risk asset prices. The former scenario is arguably more difficult for the Fed, because rising energy prices act as a tax on the economy while also being inflationary. How would the Fed react to a negative payroll print with concurrent new highs in oil?
| 5/20/2022 | 5/27/2022 | chg | ||
| UST 2Y | 262.0 | 249.6 | -12.4 | |
| UST 5Y | 280.3 | 273.4 | -6.9 | |
| UST 10Y | 278.1 | 274.7 | -3.4 | |
| UST 30Y | 299.2 | 297.6 | -1.6 | |
| GERM 2Y | 34.2 | 35.3 | 1.1 | |
| GERM 10Y | 94.4 | 96.3 | 1.9 | |
| JPN 30Y | 98.9 | 99.3 | 0.4 | |
| CHINA 10Y | 281.9 | 274.7 | -7.2 | |
| EURO$ M2/M3 | 149.0 | 141.3 | -7.8 | |
| EURO$ M3/M4 | -41.5 | -29.0 | 12.5 | |
| EURO$ M4/M5 | -6.5 | -10.5 | -4.0 | |
| EUR | 105.63 | 107.36 | 1.73 | |
| CRUDE (active) | 110.28 | 115.07 | 4.79 | |
| SPX | 3901.36 | 4158.24 | 256.88 | 6.6% |
| VIX | 29.43 | 25.72 | -3.71 | |
https://www.cnbc.com/2022/05/09/uber-to-cut-down-on-costs-treat-hiring-as-a-privilege-ceo-email.html
https://www.zerohedge.com/markets/we-could-see-million-layoffs-or-more-here-comes-job-market-shock
