“There is a pot of gold at the end of this rainbow”
–Larry Kudlow
Remember, Trade Wars are both “good” and “easy to win”. So, if you are fortunate enough to find yourself in an escalating tit-for-tat tariff reciprocation campaign, the strategy is relatively straightforward:
Simply make your tat bigger than their tit capacity (I know how that reads but let’s just go with it).
In other words, if you want to “win” a trade war with a country to which you export a total of $100B in goods and services, just apply tariffs in excess of $100B to the goods they send to you – thus exhausting and castrating their retaliation capacity.
See? Simple.
Anyway, when I was younger one of my friends decided to steal a car and go joyriding.
Now, everyone knows joyriding is both “good” and “easy to win”, provided you follow standard joyriding procedure.
In this instance, no sooner had my friend taken the car and pulled up to the first stop light when a police car pulled up right behind him. Pure happenstance.
Instead of coolly driving and parking in the public plaza ~100 ft. away, he proceeded to take 4 right hand turns in a row, ending up back at the same spot at the same light … with the same cop right behind.
It wasn’t a malicious act, really. Just a bored (& stupid) but otherwise intelligent, humanistic kid on the wrong end of uncharacteristic, tragicomical caper.
Just a colorful, metaphorical reminder on jobs (and tariff escalation) day that an ostensibly reasonable and otherwise accurate survey measure can and will go off the statistical rails in any given month for no obvious reason.
Back to the Global Macro Grind…
Consensus is looking for +185K on the NFP headline and a -0.1% reduction in the Unemployment Rate …. Which, of course, carries a margin of error of +/- 115K and +/- 0.2%, respectively. Happy guessing!
We provide the obligatory labor market context below but it’s all just superfluous pretext really. What consensus is looking for is an exact repeat of last month with a strong headline, diffuse gains and muted wage inflationary pressure.
What consensus is not looking for alongside the inimical trinity of bouncing yields, further slowing in European data and resurgent tariff angst is for a soft headline and outsized AHE gain to fully kitchen sink Goldilocks in the first week of 2Q.
Here’s your March NPF tea-leafing and contextualization:
- Four’ Easters: We had an uncharacteristic 4 Nor’ Easters roll through in March. Similar to the Anti-Goldilocks dynamics in January Employment report, any related distortion will drag on the headline and support average hourly earnings (lower paid, hourly wage workers not going to work and thus not being included in the averages will inflate the average)
- Unemployment Rate: February realized one of the largest sequential increases in Labor Force Participation (LFPR) ever, with the LFPR rising +0.3%. Historically, similar increases have been met, universally, with a drop in the Unemployment Rate in the subsequent month. Consensus is looking for a -0.1% decline to 4.0% as we continue to flirt with the elusive, sub-NAIRU 3-handle on Unemployment.
- ADP vs NFP: Over the past 20 years, the sequential, directional change in NFP is the same as that of the ADP series 64% of the time. ADP was lower sequentially against an upwardly revised February estimate, implying a high probability for a lower NFP headline in March. Fun statistical trivia, but if your baseline expectation is for a gain on last month’s +313K headline, hopefully you’re leveled long that expectation with someone else’s money.
- ISM, NFIB, Fed regional Survey’s: The employment related series across the various survey data were mixed but largely static in the most recent month, suggesting still strong labor demand. The Jobs Hard to Fill and Compensation series in the NFIB Small Business survey continue to signal accelerating, albeit moderate, wage inflation.
- Initial Claims: The trend in initial claims tells us something about the separations side of the Net Hires = job findings + job separations side of the equation. It’s supportive of a direction view on the NFP headline but it’s not particularly predictive from a point estimate perspective. But, as we’ve highlighted recurrently, from a cycle accounting perspective, Initial Jobless Claims have been one of the best pace keepers of the economic cycle with the rolling trend in claims serving as one of the most consistent lead indicators for the labor market and broader macro cycle over the last 7 cycles. Lower lows in rolling initial claims in March are obviously supportive of further labor market tightening and continue to suggest recession risk and big credit market dislocations (on the consumer side) are not imminent.
Where it matters in terms of the income and consumption growth arithmetic:
Payroll Growth: Last March is a very easy comp as we only added +73K on headline NFP. Together with last month’s outsized gain, the rate-of-change implications for employment growth are discretely positive as we only need +74K to get a sequential acceleration in year-over-year payroll growth.
Income & Consumption … Assuming a largely flat trend in average weekly hours, the only way to get an acceleration in aggregate income growth is via accelerating payroll growth and/or accelerating wage growth. The larger trend in late-cycle payroll growth will invariably be further deceleration and earnings growth will have to increasingly shoulder responsibility for maintaining or soldiering income growth higher .… but not this month as payroll growth should be supportive of aggregate income growth, and consumption growth by extension.
The organic trend in income growth will become increasingly important to buttressing consumption growth as the tailwind from a declining savings rate progressively diminishes. Recall, the savings rate was up a full +100bps in February off the December lows (which had be falling 80-100bps year-over-year and printed just north of all-time lows to close 2017) and the savings rate comps get progressively harder over the balance of the year.
Note also that any acceleration in aggregate income growth in March will occur concurrent to any first reported impacts to spending from the change in tax-withholding (i.e. higher after tax income) that occurred in early-to-mid February.
And, again, if minimum wage increases, tax law changes and a corporate bonus bonanza can buy the economy some rate-of-income-growth buffer while the labor market continues to tighten over the next year, there exists a higher probability that organic wage inflation could then take the hand-off.
It’s a sirenic and not unreasonable consumption outlook song. It’s also part of the reason we haven’t pulled Consumer Discretionary off our preferred sector exposure list, yet.
We made some sales into the bounce again yesterday and are coming into today’s Trade, Tech, Trump and NFP Torrent more net short.
We’ll read and react accordingly this morning in a way that aligns with both our Trend fundamental outlook and quantitative risk management signaling.
Or not …. everyone knows that “short and hold” is always a “good” and “easy to win” strategy.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.70-2.87% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Nikkei 200 (bearish)
DAX 115 (bearish)
VIX 17.11-26.30 (bullish)
USD 88.61-90.54 (neutral)
Oil (WTI) 62.08-64.48 (bullish)
Gold 1311-1356 (bullish)
Copper 2.95-3.07 (bearish)
Have a great weekend,
Christian B. Drake
U.S. Macro analyst
