Today we learned that the U.S. economy added a paltry 38,000 jobs in the month prior. Our Macro team nailed it.
In this edition of Washington To Wall Street, Hedgeye Potomac Chief Political Strategist JT Taylor and Director of Research Daryl Jones discuss what a third-party Libertarian presidential bid may mean for Donald Trump’s Oval Office aspirations.
"Less than six months into the year, the Fed has been hawkish, pivoted to dovish, pivoted to hawkish and will now pivot to dovish," Hedgeye Senior Macro analyst Darius Dale wrote on Twitter earlier today.
Today's #JobsBomb spells trouble for those flippant Fed heads. Here's why.
Stepping back a moment to better contextualize today's Jobs Report in both delta and differential terms, here are two charts from Dale:
"If you think this heinous Jobs Report is a one-off, you are literally paid to be willfully blind to #TheCycle," Dale writes. Take a look at what Jobless Claims data has long been signaling (i.e. we're about 3-6 months of improving claims data away from recession).
And here's the KEY chart that shows Non-Farm Payrolls rolling off the February 2015 cycle peak in rate-of-change terms (i.e. #NotGood).
In other words, as the linear, labor economists at the Fed continue to witness deteriorating jobs data, it will become increasingly difficult to sell the "all is good" U.S. economic narrative.
In fact, the market is already pricing in a more dovish Fed. Look at the latest implied rate hike probability reading versus where it was yesterday (note the probability of a July rate hike was nearly cut in half in the matter of a day):
We'll take this time to reiterate what we've been saying for a while now...
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Editor's Note: Below is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy.
Please note that while the views expressed in this column do not necessarily reflect the opinion of Hedgeye, Thornton's analysis is hard-hitting and provocative. A must-read for thoughtful investors.
In a speech on May 26, Fed Governor Jerome Powell noted that “A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth.”
One cannot help but wonder what Governor Powell considers to be a “long period.” The federal funds rate quickly headed to zero when the Fed increased the monetary base by making loans to financial institutions following Lehman Bros. bankruptcy announcement on September 15, 2008. The Federal Open Market Committee (FOMC) slowly reduced its target for the funds rate from 2% to effectively zero by December 15, 2008, in spite of the fact that the funds rate was already near zero, see "Requiem for QE."
The funds rate target remained at this level for SEVEN years before the FOMC increased the target to between 25 and 50 basis points on December 16, 2015. So the funds rate has been excessively low for nearly 7.5 years. This is unprecedented, and an extremely long period.
I am also struck by Powell’s suggestion that “very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth.” It’s already happened! The FOMC’s low rate policy has already led pension funds and retirees to take excessive risks.
It has also produced unsustainably high asset prices as evidenced by this graph from "My Scary Chart." The figure shows household net worth as a percent of disposable income. The first two peaks were due to unsustainable increases in assets prices: The first, to equity prices, the second to home prices.
The third is due to a combination of equity and home prices. This rise in household wealth also seems to be unsustainable. The question is: Does it decline slowly to the trend line or does it fall precipitously like the previous two?
The FOMC’s policy has already caused banks to make an extraordinary quantity of loans in a slow growth economy and has caused the M1 money supply measure to more than double since Lehman’s announcement, see Excess Reserves and Excessive Risk Taking.
Powell appears to be waking up to the consequences of the FOMC’s policy. He concluded his speech with, “My view is that a continued gradual return to more normal monetary policy settings will give us the best chance to continue to make up lost ground.” However, he is yet to come to the realization that the return to “normalcy” needs to happen quickly not gradually. Waiting two or more additional years won’t improve the economy; it can only cause further harm.
Takeaway: Today's NFP report is a certified train wreck for the "economy is improving" crowd.
Today's #JobsBomb was downright terrible. Vomitous. And to be clear, virtually no one on Wall Street saw this coming ... except of course our Macro team.
Rewind to November. Outspoken Hedgeye CEO Keith McCullough was on Fox Business. He was warning viewers about the risks of #EmploymentSlowing, while most pundits were applauding the "Where's Waldo" Jobs Report that showed a non-farm payroll number of 271,000. In the clip above, McCullough laid out our call on #TheCycle and why the U.S. economy is sliding off its peak.
Takeaway: Yesterday, markets predicted a more than 50% chance of a July rate hike. Now, rate hike expectations don't get above 50% until December.
The #JobsBomb (a.k.a. the May Non-Farm Payroll number of 38,000) just shocked Old Wall consensus.
Take a look at investor's most recent expectations for a Fed rate hike. Yesterday, markets were predicting a more than 50% chance of a July rate hike. Now, rate hike expectations don't get above 50% until December.
What a difference a day can make...
We're not surprised. We've been saying #EmploymentSlowing for a while now.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.