“Dec 2020, BTC = $20K = ‘Yeah, I’m rich!’ …. May 2021, BTC = $35K = $hit, It’s Over, I’m ruined”
- CT (Crypto Twitter)
The graphic below is great. And not only if you’re a crypto-phile.
It’s a quintessential case-study in #ZoomingOut.
What happens on the margin always matters, but decision making and effective risk management doesn’t occur in a duration agnostic vacuum, so the marginal also matters within the context of the larger, duration dependent cycle.
The mania and myopia of CT, despite the #HODL ethos, is sufficiently captured by our Headline quote above.
By design, however, my crypto stream (and all my streams) is purposefully engineered to dampen echo-chamber risk by balanced inclusion of opposing opinion, dispassionate analytics and purveyors of big-picture #ZoomOut context …..
The high frequency domestic macro docket is relatively heavy this week, with Friday’s June NFP both the Headliner and the capstone.
Labor remains at the nexus of consequential macro cross-dynamics, so let’s start by #ZoomingOut and pulling back the context curtain.
Over the course of 10 years, from Feb 2010 to Feb 2020, NFP employment increased by 22.8M.
We lost 22.4M jobs over the span of 2 months in March/April 2020 as we careened over the Covid cliff.
An entire decade … an entire macro cycle …. the entirety of collective Policy maker toil and global, Post GFC capitalistic mojo wiped out in weeks.
We have gained back 14.7M jobs, effectively compressing 7 years of ‘normalized’ hiring into a single year.
Is it a surprise that a full re-onboarding hasn’t seamlessly occurred, particularly with residual uncertainty, externalities and idiosyncratic frictions still present ... of course not!
Now, let’s redux how the labor interplay with income/demand, prices and policy remains the key conjuncture.
- The acute demand-supply imbalances pervading the domestic macroeconomy owe, in large part, to insufficient labor inputs ... that is true both domestically and globally.
- Those imbalances where, again, labor remains a central component, have been on conspicuous display across the Goods economy and more recently across the Services sector. The burgeoning labor scarcity also threatens a wage cycle and the prospects for more conventional demand pull inflation.
- And it only took 2 pseudo-rogue inflation prints for the Fed to flinch …. In fact, recent month price data wasn’t rogue at all as the growth data specifically comped against trough COVID base effects and well understood supply bottlenecks driving select, invariably short-term price distortions, effectively representing the very definition of transient.
The evolution in labor is key for straightforward reasons:
- It will increase output, helping to re-equilibrate fundamentals. That demand-supply renormalization will reduce price pressures, and …
- Ongoing, large scale hiring reduces the threat of outsized wage increases and the prospect for any type of wage spiral.
Collectively, those dynamics works to:
- Reduce policy pressure around tightening
- Reduces prospective margin pressure for those companies and industries that can’t take price.
This, of course, is where it gets interesting.
The Fed is looking for “substantial further progress” and primarily using the labor market as its barometer ... but “substantial further progress’ is just as likely to bring inflation pressure down, not up, in the present instance.
Does the Fed sit tight as employment rises and price growth (unevenly) moderates in hopes that domestic eco evolution and rolling global reopening aligns the macro constellation in the elusive Goldilocks 2.0 formation?
The above is an exercise in ‘what if’s’ wrapped in layered assumptions, but it’s not an unreasonable evolution to consider. We’ll weave some additional macro tapestries worth considering over the coming week with KM out.
Anyhow, what “if’s” can only be built from the sometimes sandy loam of what “did” and the income and spending data for May offered no intriguing plot twists as the data played its part in comporting with the prevailing/emergent domestic macro narrative.
As we highlighted last week, the data carried a few important, if (analytically) pedestrian, notables:
- On a year-over-year basis, Spending decelerated to +14.5% Y/Y while Total Personal Income accelerated to +2.8% Y/Y.
- April spending was distorted/amplified by receipt of the final stimulus check in March so sequential softness was unsurprising and effectively reflected in consensus estimates for negative sequential growth.
- April was revised moderately higher (Nominal Spending revised from +0.5% to +0.9% M/M, Real Spending revised from -0.1% to +0.3%) … so any interpretation of the sequential RoC data also has to be pushed through that contextualization filter.
- The Savings Rate fell to +12.4% --> around 50% lower than the recent peak but still ~50% higher than normalized levels….
- …. both cumulative excess savings (north of $2.4T ) and a drawdown in the Saving Rate will continue to buttress household spending over the near/medium-term.
- Aggregate Private Sector Salary and Wage growth rose +15.7% Y/Y. That is down from +19.3% Y/Y in April, but the modest decel is singularly base effect driven. Indeed, 2Y growth accelerated another +20bps to +5.9% Y/Y
- Ahead & under the hood: The termination of pandemic era jobless benefits and the expiration in loan/eviction/mortgage moratoria will serve as an income shock with flow through to discretionary consumption, but only to the extent those individuals do not find employment and/or drawdown cumulative savings. On the other side, state/local stimulus support funds remain largely undeployed and monthly child-tax credit checks to household are set to begin in July.
In other words, the underlying income trend continues to accelerate and ‘organic’ consumption capacity will continue to take the handoff from Fed-fiscal support.
Labor gains over the coming month(s) will obviously be key in defining both the consumption and inflation outlook but the data procession remain mostly benign vis-à-vis our expectations: Continued improvement in Aggregate Private Sector Income growth associated with ongoing, large-scale payroll gains in combination with a savings deployment amplifier all stand in support of the continued renormalization in spending in the direction of Services while suggesting the Quad 2 consumer train is not set for imminent derailment.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.45-1.60% (bullish)
SPX 4193-4299 (bullish)
RUT 2 (bullish)
NASDAQ 13,985-14,445 (bullish)
Tech (XLK) 141.21-146.62 (bullish)
Energy (XLE) 52.28-56.94 (bullish)
Financials (XLF) 35.06-37.73 (bullish)
Utilities (XLU) 62.40-64.73 (bearish)
Shanghai Comp 3 (neutral)
Nikkei 28,190-29,690 (bullish)
DAX 15,400-15,822 (bullish)
VIX 14.35-19.24 (bearish)
USD 89.75-92.59 (bearish)
Oil (WTI) 70.45-74.71 (bullish)
Nat Gas 3.20-3.57 (bullish)
Gold 1 (bearish)
Copper 4.09-4.55 (bullish)
Silver 24.81-27.80 (neutral)
Christian Drake
Macro Analyst
