01/19/24 08:52 AM EST

Key Driver of "Soft Landing" Narrative is Unemployment

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

With the Magnificent 7 impacting the markets in their characteristic fashion, it may seem superfluous to analyze unemployment data. Yet, it's their remarkable influence that underscores their importance: as long as individuals are employed, they contribute to their retirement funds, thereby becoming implicit equity investors on a cap-weighted basis. A brief 12-minute primer on market inelasticity should bring you up to speed.

The latest claims data bolsters the "soft landing" advocates, with diminishing discourse on the inverted yield curve.

Initial jobless claims as of January 13 fell to 187,000, a decrease of 16,000, marking the lowest since September 24, 2022, when it was 182,000.
A slight upward revision from 202,000 to 203,000 was made to the previous week's claims.
The four-week moving average fell to 203,250, further smoothing out short-term volatility.

When considering the employment landscape, the retirement of 10,000 to 12,000 baby boomers each day should theoretically propel job openings; however, this isn't straightforwardly the case. The evolving skills gap is apparent as retiring experienced workers make way for a younger cohort with distinct competencies. The transition isn't instant; truck drivers, for instance, can't pivot to AI development overnight.

The data's reliability is questioned when noting that in 2023, government hiring outpaced the manufacturing, transport, warehousing, mining and construction sectors combined. With the Nasdaq peaking, jobless claims at a nadir and liquidity abundant, market signals read, "All systems go." We are not sure about that, but as always, we will follow the models: Gamma/options market influences volatility, volatility shapes flows, flows adjust systematic exposures and these exposures set prices. The end.

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