"Fate whispers to the warrior 'You cannot withstand the storm.', the warrior whispers back 'I am the storm.' "
With the bench scoring 45 points and Klay and Curry only dropping 20 combined in last night’s Game 1, the Warriors stormed the Cavs with their “Strength In Numbers” mantra turned strategy.
The “numbers” in Macro land, on the other hand, may be less about “strength” and more about “stories”.
Reported April data showed some of the largest sequential increases in years, from New Home Sales to Retail Sales to PCE. Is it because April had 5 weekends this year instead of 4 in addition to the Easter shift, giving it 5 effective weeks relative to 3 in March – a 40% difference and the first such instance since 2005?
Or maybe, after 85-months, the escape velocity stars aligned and decreed April, precisely, was the month of durable emergence.
Back to the Jobs Day Macro Grind ….
The narrative foil for a poor payroll print this morning is the Verizon strike which involved 36K workers and ran from April 13th to May 30th, including the reference period for the Establishment Survey.
In principle, the impact to headline NFP should flow through lower employment in telecom and potentially drag on any measure derived from the Establishment Survey, including average hourly earnings and aggregate hours worked.
In practice, it probably just adds to the noise and mania of the day and provides anecdotal ammo for bulls and bears to both claim victory on a soft-to-middling number.
If it’s soft, the bears were right on growth and the labor cycle slowing. But, but … goes the bullish rejoinder … it doesn’t really matter because it was negatively distorted so it should be discounted and looked past.
The lone loser scenario given prevailing expectations is for bears on a blowout number.
But then, of course, they can just say that the strength raises the probability of a policy blunder as strong dollar deflation and declining growth/inflation expectations drive asset price deflation on the other side of misguided hawkishness.
If that’s difficult to follow, it breaks down to something like this:
- Bad = good
- Middling = great
- Good = bad (…or maybe good, depending on your duration)
That’s not to say that neither argument is credible, it’s just that the narrative parading is proactively predictable. Much of what we do is engaging and impactful but, at times, sophistry, spurious activity and silliness predominate.
I’m not sure where I’m going with this so let’s just turn it back to today’s data:
OMG, deceleration is so Trend-y right now! Inclusive of whatever we get in terms of the Verizon distortion, the rate-of-change slowing in the labor cycle will continue. By the numbers, unless we get something >278K (consensus is at 160K vs 160K prior) then employment growth will register another sequential deceleration. And unless we get something >698K then the peak rate-of-change recorded in February of last year will remain rearview.
Dude, quit getting your pro-cyclicality on my portfolio! Labor economists, FOMC Chairwoman included, expects NFP gains to slow to ~75K as labor market slack diminishes and moves towards just needing to absorb new entrants. Implicitly then, a crawl to sub-100K NFP is part of the medium-run forecast and embedded in the calculus around the “probable” continuation of the tightening cycle – despite such a dynamic confirming the late-cycle’ness of it all. Countercyclical positioning should complement procyclical policy action.
Godot’s Cycle: As we’ve highlighted, just because we’re charged with generating high-frequency macro commentary doesn’t mean the slower, temporal progression of the cycle ceases to exists. As the Chart of the Day below illustrates, our larger, late-cycle point is simply that once we roll past peak rate-of-change in payroll growth, it’s a one way street towards convergence with 0%. The period of the cycle is years and historical precedents suggest some further runway in the present employment expansion but the slope of the line has now been negative for 15 months and the baseline expectation should be for that to continue to play itself out in autocorrelated fashion to the downside.
Inside Out: We care about the headline Payroll number to the extent it’s a focus for policy makers. Internally we care about the internals of the employment report because it gives us a preview of what the official income growth data (& consumption growth by extension) will look like when its reported later in the month and because it provides some insight to a preview of the ISM data in the subsequent month. Look at the sum of aggregate hours growth and hourly earnings growth in the NFP release for the directional read on income and consumption growth and look at aggregate hours worked in manufacturing for the directional read on industrial production in the manufacturing sector (the biggest industry component in the Industrial Production report).
Mix Matters: Wage inflation has shown some modest mojo in recent months but has broadly disappointed expectations and conventional Phillips Curve modeling for years. Thinking about structural dynamics, I think there are a couple factors to keep in mind, both of which are modest-to-moderately deflationary.
- Demographic: Compositional change in the labor force is as pronounced as it’s been since Boomers matriculated through prime working age. The turnover associated with the replacement of higher wage, Boomer retirees with younger, comparably lower-wage full-time workers is disinflationary – even if total hiring is strong and the labor market conditions are taut by historical standards.
- Labor Participation: To the extent discouraged workers become encouraged and the cyclical gap in the labor force participation rate closes, the impact will be disinflationary. Collectively, the skill-sets of sidelined and long-term unemployed workers are not those driving the marginal change/acceleration in wage growth.
On this day last year, my kids pulled the fire alarm at the town hall and forced a 2-hour evacuation of the building … in the rain. On this day next year we’ll be 12 more months into the payroll growth slowdown, the black line in the chart will be lower and the red bar more ominous.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.75-1.90%
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst