‘If you’re the smartest person in the room, you’re in the wrong room.’
- common phrase
Trending macro markets generally adhere to the stylized picture below with shorter-duration oscillations around a longer-duration trend line. (h/t Dalio)
Life has a similarly sneaking tendency to operate as a periodic function.
The goal is to cultivate (life) policy that extends the period and increases the amplitude of the growth interval.
As we head into the first official weekend of the summer (last week’s cold holiday rain didn’t count) and as the seasonal inflection converges with step function progress in Macro renormalization, the fates have awarded us with the opportunity for reset, reflection and renewal.
An opportunity to craft a hinge in your personal history across whatever dimension you choose (work, family, philosophical, spiritual, etc). An opening to pivot or accelerate in the direction of self-actualization.
A gentle Friday reminder that you are generally the average of the people you (decide to) surround yourself with.
Greatness remains very much a choice.
Back to the Global Macro Grind …
So, now that you’ve been primed for some psycho-emotional exfoliation, a not so gentle reminder that it’s Jobs Friday and all myopia and superfluous analytical activity will again converge ahead of the market open.
I’ve been in full posthumous equine beating mode with respect to detailing the prevailing and conditional labor dynamics over the last couple months, so we’ll keep it tight.
Let’s begin by gaming out the asymmetries.
What do we know:
- Demand continues to increase, supply and labor constraints continue to intensify, the combination of which continues to flow through prices.
- Labor remains the primary conduit for increasing supply and renormalizing the prevailing imbalance(s).
- Underwhelming hiring in April amidst step function improvement in Services activity served to stoke concerns around intensifying demand-supply imbalances and prospective price spiraling.
- With NFIB Jobs Hard to fill at an ATH, ISM Mfg and ISM Services Employment sliding, Employment across the Fed Regional Survey’s backsliding, the Hires-to-Openings ratio at a record low, the share of job postings indicating “urgent” doubling in the last couple months and all manner of anecdata all pointing in the direction of tight(ening) labor supply.
- The pace of employment gains in 2H will be critical in determining the balance and extent to which conditions equilibrate via real output growth or via price growth.
That is the pretext for today’s data and most/all of it will still apply on the other side of it.
The Tourist Playground
Whether enhanced pandemic related jobless benefits are serving as a disincentive to labor force participation and meaningful constraint on hiring remains unclear.
This isn’t so much Macro Tourist fodder as it is the point where the Venn diagrams of sound bite punditry, political narratives and real macro implications intersect.
The tendency has been to frame it in binary terms.
Effectively: Weak April jobs number = too much benefits = evidence we need to end enhanced support.
If today’s number is weak, we’ll get the same framing and chorus or related commentary. If it’s conspicuously strong, we’ll get the converse.
If it’s a solid but middling number, then that is probably a good thing also (see the last section here: Early Look: Peak FUD?)
The San Fran Fed (HERE) says it’s been a moderate disincentive. Real-time job search data from Indeed (HERE) show search activity increased, but only moderately and temporarily, in states that announced termination of federal UI benefits.
In any case, that theory will be put to the test as 24 states terminate pandemic era jobless benefits - pushing 3-4 million people into the prospective labor pool - over the course of June/July (for a fuller discussion see: Early Look: Nine Meals from Anarchy).
A large decline in Jobless Claims will accompany those initiatives. And to the extent those individuals don’t transition to employment, it will serve as a moderate income cliff and dampening offset to the $2.4T in cumulative excess savings in queue for deployment.
A Couple Bigger Picture Dynamics:
- Demand is rising faster than hiring. This is a quintessential early cycle phenomenon and means, by definition, that productivity growth will improve (output rising faster than labor inputs).
- Capex has accelerated meaningfully. How durable that acceleration proves remains an open question but it should support medium-term productivity gains.
- Early retirements have accelerated, particularly among those in the 65-74YOA bucket – opening up opportunity for new entrants and decision-power transitions. This is likely to be margin positive (replacing high cost center workers with younger/entry level hires) but productivity negative in the aggregate, at least initially.
So what does this all mean?
In short, demand is going to be there near-term, so:
- If hiring is strong, it will reinforce the demand impulse and continue to support prices even as supply conditions renormalize
- If hiring is weak, it will reinforce/amplify the demand-supply imbalance and support prices.
If you accept demand as a (near-term) given and that both outcomes probably support prices over the nearer-term, then it’s simply next-verse-same-as-the-first…. = more Quad 2.
An equivalent but alternative framing is to simply remember that to some extent we remain in a pseudo-bizarro world of managed and administered markets where all roads are really the same road.
As we highlighted following the April NFP Data, the soft print (might) suggest inflationary pressure isn’t as tight as many believe … but the readthrough from that is that the Fed then has more leash to let things run hot … Which means inflationary pressure should build … which is just the same conclusion but time-shifted slightly.
Remember ….
In Macro, everything is obvious and nothing is what it seems.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.55-1.71% (bullish)
UST 2yr Yield 0.13-0.18% (bullish)
SPX 4154-4233 (bullish)
RUT 2199-2330 (bullish)
NASDAQ 13,452-13,905 (bullish)
Tech (XLK) 135.33-140.21 (bullish)
Energy (XLE) 53.05-56.07 (bullish)
Financials (XLF) 37.20-38.70 (bullish)
Utilities (XLU) 64.22-66.30 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 28,209-29,292 (bullish)
VIX 15.13-20.10 (bearish)
USD 89.51-90.61 (bearish)
Have a great weekend,
Christian B. Drake
Macro Analyst
