Blue Steel? Ferrari? Le Tigra? They're the same face! Doesn't anybody notice this? I feel like I'm taking crazy pills!
-Mugatu, Zoolander (clip here: Crazy Pills)
QE? NIRP? rhetorical dovishness? $8T+ in negative yielding sovereign debt? serial negative estimate revisions? all-time lows in bond yields? decelerating domestic employment/income/consumption growth? sub-2% potential output? utilities/low growth/low beta outperformance?
They’re all outcroppings of the same slow-growth reality! Sure, there are recurrent bad = good, down-dollar counter-trend reflations but that’s why they’re called “counter-Trend” because they are not the overriding reality. Doesn’t anybody notice this? If feel like I’m taking… !
Back to the Global Macro Grind ….
If you are unaware, in addition to being a prolific “ambiturner” from a policy perspective (hawkish-dovish-hawkish-dovish pivots YTD), Janet is a noted labor economist.
In other words, both her primary research and policy focus centers on labor market dynamics.
It is also likely that she is aware that you are aware that the market is well aware of the current softness in the domestic labor market.
For the unaware:
- NFP Growth: Employment growth decelerated markedly in the latest month on both an absolute and rate-of-change basis and has now been slowing for 15-months and …. 100% of the time, it converges to 0% growth everytime.
- LMCI: Janet’s favored dashboard labor Indicator, The Labor Market Conditions Index (LMCI) dropped to an index reading of -4.8 in May, marking a 5th consecutive month of decline, a 7th straight months of deteriorating conditions and the worst reading since 2009
- ISM Employment: While expansion in the 80%+ of the economy that is the Services Sector slowed to its weakest pace in 27-month in May, the employment component of the index fell into contraction in May, matching the lowest reading since 2011.
- JOLTS: The Job Opening and Labor Turnover Survey (JOLTS) provides the internals on the gross flow of both Hirings and Separations and is released on a month lag to the NFP report. The data for April, reported on Wednesday, showed Job Openings making a new all-time high (data goes back to 2001) while Hires fell to an 8-month low (& will again when the May data are reported) and the quits rate retreated -10bps to 2.0%. As we’ve highlighted previously, a hallmark of an efficient and well-functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. Or so conventional thinking goes. The issue has been the apparent, burgeoning skills gap reflected in the growing spread between Job Openings and Actual Hires and the continued rise of “Jobs Hard to Fill” component of the NFIB Small Business Survey. There are a number of compelling explanations for the skills gap which I’ll address in a future EL.
So, from a labor-centric Fed, what can we expect from the FOMC meeting next week?
Our Hedgeye-Potomac colleague, former Fed Vice Chairman and Potomac Research Group Senior Economic Strategist Don Kohn, previewed next week’s meeting/decision on a call yesterday. Here is a selection of his salient takeaways (paraphrased):
- No Change in June … or July: June is an obvious no go from a tightening perspective and July carries less than even odds. If employment growth, inflation and household spending all continue to improve then it becomes higher probability but everything needs to fall into place for July policy action to occur. From a messaging perspective, raising in July when there is no scheduled press conference, would be a strong indirect conveyance that we are transitioning to a more normalized environment where nominal policy changes needn’t be oversensationalized.
- Projections: 2.25% was the middle of the range on growth estimates in the last SEP. That will likely be revised lower given the reported growth thus far as it would imply overly optimistic assumptions around 2H growth. It would be unsurprising to see modest upward revisions to Inflation projections. [Note: the net of this is a stagflationary update with Growth ↓, Inflation ↑]
- Distribution, Not Dots: The Median is a flawed indicator of where the committee sits collectively. For example, in the last SEP the median was for two rate increases in 2016 but there were more people above it than below it. One thing we might see next week is people fall back towards the median, shifting the distribution/skew but leaving the median reading itself unchanged.
- Modestly Accommodative: Janet’s recent (& altered) characterization of policy as “modestly accommodative” expresses lower confidence around the prospect for a rising equilibrium interest rate. In other words, we should expect to see the path/trajectory of policy revised to something flatter … if not for the balance of 2016, then for 2017 and beyond.
- Levels, not Changes (In response to a question asking if the Fed cares about 2nd derivative changes): It’s the level of the unemployment rate relative to its sustainable value that will ultimately determine inflation pressures. And Labor gains had, arguably, been running too hot and needed a slowing in so as not to overshoot the unemployment rate on the downside with negative flow through to prices. Janet indicated that, in taking a “balanced” approach to policy, they wouldn’t mind an overshoot as undershoot on the inflation target would be balance by an overshoot on the employment target. [Note: in this context, the FED is viewing negative 2nd derivative changes, not as an indicator of a late-cycle slowdown, but as a positive development supporting achievement of their mandate]
In short, we’re likely to see a modest negative revision to growth projections, a flatter projected policy trajectory and a shift in focus from the prospects for reaching the inflation target to the prospects for further progress in the labor markets.
Remember, however, that projecting an air of confidence and maintaining maximum policy optionality requires carefully treading the hawkishly dovish messaging line … or maybe it’s the dovishly hawkish line.
In either case, it’s clearly not nonsensical that we haven’t never seen a data dependent policymaker that did not mention neither labor growth nor price growth. Ignoring both certainly won’t get you nowhere!
That was the most confounding double negative filled sentence I could come up with at half past 5:15am in the morning after three days before Sunday morning.
If that made sense to you then there is probably a “communication tool-ing” job waiting for you at the Marriner Eccles Building in D.C.
If it was confusing & contradictory, no worries, you’re not alone. After all, domestic equities and global bonds are at all-time highs, at the same time.
If everyone else is taking crazy pills, who’s really the crazy one?
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.63-1.76%
Oil (WTI) 47.77-51.47
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst