“Every lie we tell incurs a debt to the truth. Sooner or later that debt is paid”
-Valery Legasov, Chernobyl 

So, expectations have been managed, pivots have been procured, messaging has been massaged, the political and policy double talk crafted and polished, ATH’s cultivated and market crises thus far averted.  Welcome to 3Q and peak interventionism as the longest domestic expansion in history soldiers on. 

Coordinated easing and positive bond-equity correlations soldier on as well. Central banks remain content  setting the incline on the equity treadmill to “Himalaya,” while remaining willfully blind to the recurrent reality that VIX suppression leads not to the elimination of risk, but to the accumulation of latent risk that emerges in spectacular fashion when macro, market structure vulnerabilities and #TheCycle coalesce to breach a critical threshold.   

Every suppression of risk incurs a debt to volatility that must be paid back. 

In the immediate term, however, bonds and stocks both remain bullish Trend as the market errs on the side of optimism, giving a tacit nod to the capacity of Central Banks to effectively engineer some version of a soft landing to synchronized stagnation.     

Back to the Global Macro Grind …. 

Between Republican party defections, fresh trade and currency war bombast, renewed Fx intervention speculation, more incendiary Iran developments, a steady parade of “lowest since” macro prints domestically, the global sub-50 PMI-palooza in full effect, German factory orders tanking and actual tanks headlining D.C. Independence Day festivities, there has been no shortage of real and metaphorical fireworks in recent days.    

If you are the one gal/guy awake and reading this note this morning, congratulations, we salute your grind. 

We’ll keep it tight & quickly redux what matters ahead of this morning’s June NFP print.  Given recent trends and comp dynamics, we already know most of what matters: 

  • Consensus is looking for 160K.  A solid rebound off of last month’s cratering probably keeps the July vs September rate cut timing debate alive, but it is largely irrelevant as it relates to the 2nd derivative trends and the progression of TheCycle ….
  • We need >266K on the Headline to avoid a further slowdown in the year-over-year rate of change in payroll growth.  Not probable.  It’s also not probable – given the acute slowdown in manufacturing and broader cyclical activity – that weekly hours sees any upside. 
  • If growth in the number of people working is decelerating, as is growth in average weekly hours worked, that means aggregate hours growth is decelerating …..
  • Assuming productivity is largely static, the more or less hours you work the more or less stuff you make/output you create.  In other words, aggregate hours remains your low intensity baseline read on real output growth.  In the Chart of the Day below you can see how Real GDP maps with Aggregate Hours growth along with how we are tracking thus far in 2Q. 
  • If aggregate hours growth is decelerating, the only way to get aggregate income growth flat-to-higher is via an acceleration in hourly earnings growth.  And since you can only spend what you make and what you borrow (household credit growth remains in Trend deceleration), the trend in income growth continues to define the baseline outlook for consumption growth.
  • We continue to expect some late-cycle wage inflation to manifest further and, coupled with the decline in the savings rate, should support a largely flattish trend in household spending growth nearer-term.  

Remember, outside of the most severe recessions, consumption growth rarely actually ever goes negative – it’s business investment, inventories and the Trade balance that are the principal drivers of the slowdown in headline GDP. 

And those expenditure buckets are under particular pressure here presently.  The underlying slowdown in growth, amplified by Trade and Tariff effects has already curtailed domestic private investment and capex comps only get tougher in the near-term.  

Similarly, slowing demand and import hoarding ahead of tariff implementation drove inventory levels higher while pushing Inventory-to-sales ratio’s to their highest level of the cycle over the past year.  In other words, inventory investment will not remain an outsized support to growth from a GDP accounting perspective.  Elevated inventories also = lower demand = lower industrial activity.  It also generally equates to added margin pressure as companies discount in an attempt to push that inventory though a weakening demand channel.     

Moreover, the negative revision to the April Trade balance estimate along with the worse than expected May figures reported on Wednesday are only adding to the negative revisions to 2Q growth.  

None of the above is speculation or subjective assessment.  It’s simply statement of Quad 4 fact.  And outside of some positive, rogue NFP print, none of the above will change at 8:30am ET this morning.  

The irony, of course, is that rogue positivity in payrolls is doubly negative to the extent it forces a pricing out of rate cuts while adding to corporate profitability pressure as labor costs accelerate into slowing demand and peak comps. 

Every politicized or willfully blind position we take incurs a debt to the truth. Sooner or later that debt is paid, in PnL terms. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:

UST 10yr Yield 1.94-2.07% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 58.80-61.69 (bullish)
REITS (VNQ) 85.57-90.90 (bullish)
Financials (XLF) 26.64-28.26 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 21000-21860 (bearish)
DAX 12113-12731 (bullish)
VIX 12.17-17.52 (neutral)
USD 95.15-96.72 (neutral)
Oil (WTI) 53.12-60.03 (bearish)
Gold 1 (bullish)
Copper 2.61-2.73 (bearish)

To American Independence, the cultivation of independent thinking and the cult of data and empirical dependence.  

Christian B. Drake
Macro Analyst

Fireworks - CoD Agg Hours vs GDP