269092782 - 1_olgt8vko - PID 1851201 How can the US be in recession when the labor market is expanding so rapidly? Hey everyone, welcome to the daily briefing. Jeff Shields from clear bridges here with us today to help break down the US payroll report and what it means for the Fed and interests rates. Hi Jeff. Yeah, jobs Friday and boy, this was, this was a bit of a shock or the US economy added 528 thousand jobs in July, unemployment down to 3.5%. What is, what do you think this number is telling us? Well, I think this number is telling us what we've seen throughout the course of the first half of this year that the US economy is clearly not in a recession quite yet. If you look at job gains, it was broad-based. The unemployment rate come down. And I think this puts some pressure on the Fed to keep their foot on the brakes and continue to be very hawkish from a monetary standpoint. And this was clearly reflected in another rate hike priced into the market. So over the course of this first year of this tightening cycles, so all in all, the economy is still moving forward, although it's decelerating. We still have a really strong labor market and it's gonna take some more pressure from the Fed to bring that under pressure. So you just said something really interesting. This is, I think what we need to dig into. Your, you said it. We did have a strong labor market, I think, but now it's decelerating. So you see this number and you think like we're not only in print, were not only not in recession, like it's it's pretty smoking here. I mean, this looks like a burly good growth number, but what do we need to understand about the timing? Why are you saying it's decelerating when we have unemployment at 3.5%, while the economy overall is decelerating. In fact, the labor market is continuing to be healthy. Just to kinda put a number around how strong today's print was. You go back to the last decade from 2010 through the end of 2019, the average job creation per month was 183 thousand. Today's print was three times that number, right? So you continue to have a strong labor market, but you are seeing signs of deceleration across the economy. You're seeing it in housing. The NAH, be home builder survey had its second largest monthly drop earlier, a couple of weeks ago. I'm just seeing weaker housing starts weaker permits. You're seeing it in manufacturing PMI, which tends to lead the economy by two-quarters. That came in at 52.8. But the more forward-looking component of that new orders dropped a 48, which is almost recessionary. So you're seeing some deterioration in the US economy, but you're seeing some pockets of strength. And the last area of resilience is clearly the labor market here. Yeah. So you actually, some of the stuff that you were talking about, I think you charted on sort of a recession dashboard, which I think is really helpful because you can't just look at this one number, right? You can't just look at jobs. And I've been hearing a lot of the people that come on our air have really been pointing out that there are leading and lagging indicators, right? And so something like an employment report, I think, grabs headlines, Especially when it's this strong. When you look across your dashboard, which I think we're gonna be able to pull up. What do we, what do we need to think about in terms of what is leading and what is, what is telling us what's going to happen in the future, which is what we wanna do with our investment choices, right? And what's, what's happening in the past? Does that matter and where does jobs fall in that lineup? Well, jobs are really more of a coincidence. Indicator. Usually see strong job creation and then all of a sudden when you head into a recession, it drops pretty meaningfully. But if 500 plus thousand jobs being created, again, I think we're going to see much more of a deceleration if we end up going into recession. But you can see from our dashboard, we've had a lot of deterioration in the dashboard over the last two months. In particular, in July we had three indicator changes. And this is a stoplight analogy where green is expansion, yellow is caution, and red is recession. The three indicator changes that we had last month were commodities and retail sales, both going to read the yield curve moving to yellow. But I think more importantly, we've gone to an overall yellow cautionary signal and recession risks are rising pretty dramatically as the Fed tightening starts to make its way into the economy and talking about the labor market really quickly, Maggie, although the headline jobs print is really important for the path of Fed policy, my favorite labor market indicators, initial jobless claims, one of the top three variables and the dashboard, Usually it's the last one to turn red. And claims have been rising right there up to 260 thousand per week. If they continue to rise to the high 200 thousand per week or maybe low 300 thousand and per week range. I'm going to be a lot more concern that recession is going to be more of a base case than it already is. That's so interesting. And I think that one of the things we were talking about when we were with the editorial team, when we were discussing the number and getting ready for the show was, wait a minute, haven't we been seeing headlines about layoffs almost every day we've been seeing and maybe they're not massive, but they're pretty consistent and we've certainly heard some of it through earnings as well. Companies talking about that, that would be showing up in the weekly jobless claims. Why isn't that captured more than this monthly number? Can we can we don't want to say trust the number, but we know these numbers get revised. We know that Both on a monthly basis and when the next month comes out and also at the end of the year, right? We talked about this in a recent interview on religion. There's a big like goes back and looks at everything in revises it. Should we not be putting that much faith in this jobs report or is the labor market strong? It's just potentially going to change or be one of the last things that change. Well, you make a lot of interesting points there. And if you paint a broader mosaic of the labor market, yes, this was a Blockbuster print, but you get the establishment number, which we saw at 528 thousand today. But also you have the household number to labor surveys that are out there. Although the household number was positive at 177 thousand this month over the prior three months. It didn't it wasn't positive. It was showing a very different picture than that. The headline jobs number with initial jobless claims continuing to creep higher from here. And let's not forget job openings or down 1.2 million over the last three months, right. So you're seeing peak labor tightness. A lot of these pieces of the puzzle are pointing to a slower labor market rather than the strong print that we saw today. So I think it's going to take some time to get a better handle on which direction it's going. But I put my money on the fact that the labor market is probably slowing rather than staying as strong as this headline number suggests. Are you surprised we're not seeing it yet? I am, I am surprised. Makes sense why you have so many job openings and this thirst for labor last year was the strongest year of real economic activity in the US. It's 1984, you had pandemic related issues with people not wanting to come back into the labor market and people who are flush with cash from the pandemic unemployment benefits. But again, all of that is moving in reverse. Now, you have a fiscal negative impulse on the US economy. A lot of those cash cushions have been spent in economic growth is clearly decelerating at this point. And the Fed really wants to tamp that down. So my view is that even though this was a number to me personally, I think that we're going to see a materially slower labor market as we move to the back half of the year. Negative fiscal impulse. Basically no, no benefits, no benefits, stimulus packages coming from the government. I mean, we know probably, although a little one just passed, we're probably going to grind into gridlock as we head into the midterms. Alright, so that's it. That's a really great discussion on the growth picture. We know the other thing that really matters is inflation, especially when it comes to the Fed. And so I always thought that or have had, used to have economists tell me that the labor market is really important. Wages are really important because they're sticky. Food prices go up and down to the grocery store. But once people get a raise, they don't give it back. And it gets kinda built into structural inflation. How much does the wage component matter here and does the strength of labor market, the fact that it's hanging on so long is that a problem for the Fed? It is a problem from the Fed. And there's again a mosaic if you painted on wages, not all signals. We're pointing in the same direction Up until the print that we got today. There's three major measures of wages. You have the average hourly earnings that come out in today's report that jumped up to a half of percent month over month. So that's a real acceleration from what you've seen here recently. You have the Atlanta Fed beds wage tracker, which has continued to accelerate all years, had 6.7%. You have the employment cost index, the ECI, which we just got a week ago, which showed acceleration. So too were showing acceleration, average hourly earnings up until this release, we're showing a deceleration. Now with this reversal, I think the Fed has to remain hawkish because wage growth is not coming down to the level that would be consistent with a two or 3% inflation numbers. So unfortunately, now that they're all singing from the same hymn book, I think this creates a path or a hawkish bed going forward. And I think the markets are a little bit too optimistic where that dovish pivot. Yeah, we've got some great questions coming in and and joe Roger, welcome to the conversation. Everyone else out there feel free to drop them in and we'll get as many as we can see asking if the dashboard has turned from green to yellow. Can it go back to green? Or is this a sign that read is next, essentially, can this be a soft landing? Great question, Joe. Yeah. So if you look at the dashboards history, which goes all the way back to the early 1960s. You've had 12 yellow signals over all. Eight of those turned into recessions. Four of those were non recessionary now, and three of those instances, the dashboard turn yellow and went back to green. And only one of those instances and went to a red signal and a recession never materialized. But I think importantly with those three times where it went yellow back to green. And each of those instances, 199519982016, the Fed had a dovish pivot. In 9598, they ended up cutting rates by 75 basis points in each of those instances. And in 2016, the markets were pricing in for rate hikes for that year. But Janet Yellen took three of those rate hikes off of the table in the early part of 2016. So the net effect was a 75 basis points loosening. Now, you fast forward to today. Again with this hot jobs number that we have here, potentially another inflation printer we're going to get next week. And then we're gonna get an August and September before the next FOMC meeting. I don't see the Fed moving away from this current hawkish path of tightening with inflation with a nine handle on it currently. So again, there has been instances where it went back to green, but the Fed was instrumental on those reversals. So Roger, with another great question, if you knew the jobs report would be this big, wouldn't you have thought the markets would be down? A lot of people very confused by the market reaction we're seeing. And for those of you who maybe you're out on a Friday afternoon or late Friday evening. If you're in Europe, are not in front of any kind of computer. We did C-H bond yields move. On. This day, we saw a spike in yields on a ten year 2.8 and change right now. But stocks, and that's what the question is referring to. Remarkably calm. We saw the Dow up a quarter present, right? Nasdaq was down to 0.5%. S&p fractionally, small caps were up and you see the VIX at 21. Are you surprised by that? I personally am surprised when you first got the released this morning. Markets were down about 1% and they've rallied back. And this is, again, as you mentioned, with the rise of the ten-year treasury of around 15 basis points, I think the markets are sniffing out a weaker inflation print. I think that's what the margins are signaling here. There's a now casting tool put out by the Cleveland Fed and they estimate what inflation is going to be before it actually comes out. And the July print for CPI is expected to be 0.27% on a month over month basis. You annualize that. That's three-point to 4%, right? That's obviously because you've had lower energy and lower food prices over the course of this month. So if we get a CPI prints, even though the year over year number is going to be high and it takes a long time for these changes to filter into those numbers on a month over month basis, which is what the Fed is doing. We'll be looking at, we get something in line with what is being projected by this now casting tool, you call it 0.3%.4. I think the markets are going to continue to rally and have hope that maybe the Fed won't be as hawkish is what's initially feared. But that's my read into it. Certainly was surprising to me. Yeah, it's really interesting because I'm Harry, my laundry. I sat down with Teddy valley. Valley, the founder and CEO of small cap, a global recently. And they talked about something that I think is really relevant to this. And it is basically how rapidly everything has been moving. Let's have a listen to that clip. We can this year and we were very, very negative on the bond market. We're both thinking growth and inflation. We're going to continue higher, probably do it in one, maybe into a little bit of to the Fed was just completely outside which would cause them to make, to place this type of ketchup which would not be good for a lot of risk acid. And that's pretty much played out if we look at some of the leading indicators looking forward, all of them are straight lower. The thing that I'm contemplating working with right now is that things are evolving at such a rapid pace that I would have expected. Some of the economic numbers that we've gotten recently, whether that'd be regional Fed surveys are some of the new orders to inventory ISM prints. I would expect these things to play it over a longer period of time, but everything is happening at such a rapid rate that the slowdown today is really taking hold. And that's partially due to what the Fed has done. These are some of the largest six-month moves and to your rates, mortgage rates, and et cetera, et cetera. That's leading to I just thought today, the two-month rate of change of meeting home prices down 11.9%, which has never happened before. Um, and you're seeing now huge, big moves and the prices paid front yesterday ISM can out with prices paid and it was the biggest move, the downside and the decade the fourth largest moves since 1948. So things are just moving at such a rapid pace. So if I'm thinking about the world looking forward, I'm seeing growth that is still going down and the accelerating pretty, pretty swiftly and inflation is likely to fall through it as well. I think that's the biggest sort of variant view your very perception I have on the inflation front and can ultimately be wrong. But my base case is that inflation is going to fade much faster. Call it by the end of one than the market thinks. So right now for me, if I look across historical growth cycles, all of those ratios are tracking the average drawdown of a growth down cycle except for bonds on average, bonds are up, called the long end. So 30-year Treasuries are up on average 24% and now we're down about 15. So there's huge discrepancy between how bonds are trading relative to abnormal growth down cycle. And we're at today. And that's become our largest focus. And it seems it's related to both the Fed inflation. So if I'm looking out over the next six to nine months, I think inflation is really going to undershoot to the downside, which is where you're going to have some significant amount of opportunity. And that full interview is available on our website. And it's worth pointing out that Teddy is fun, posted a 21% return in the first quarter because he got that inflation call, right? And Jeff, that inflation call is so critical now and you definitely, there's a wide, I'd say, field of opinion and not a lot of consensus on this teddies in the camp that is going to fall quickly. It sounds like you agree with him somewhat that you do think that we could get this turn in inflation? I do. I do. I think there's clear signs of deceleration. You're seeing it across the commodity complex, the energy complex, which is going to start to filter into those numbers on a month over month basis. You're seeing a lot of inventory, Glenn at the retailers. Again, huge misses for Walmart and Target. Yet again, that discounting is going to make its way into inflation. There's gonna be some sticky areas. Obviously shelter is going to be sticky. Housing prices lead inflation by about 14 months. And with home price appreciation is still at very strong levels. That's not something that's going to come out of the overall inflation numbers until we get to the middle part of next year. But I do think inflation is going to move down into more meaningful fashion. But I think from the feds vantage point, What's that line of demarcation where they feel that trend is well established and they can start to focus on saving the economy. Back in 1982, Paul Volcker and the Fed started to get very dovish that year when CPI was running at six or 7%. And even though they got dovish, you fast forward to 1983, CPI fell to 2%. So obviously we are very deep recession, very different dynamic than what we have today. But I think the key here is inflation is a lagging indicator. And what's that line of demarcation for the Fed is at 4%, is it 5%? Certainly not going to be two or three per cent, but what's the point of a pivot? So this is interesting and this came up with Doris yesterday. For those of you who are listening, are you looking at the end? Do you think the Fed is looking at the rate of decline of inflation or the absolute level. Are they targeting a level? I think looking at, we don't know. We don't know. But I think they're gonna be looking at the month over month rate of change and the level on a month over month basis. The year-over-year numbers are gonna be very stale there tell us where we've been, where we're going. In the key here is that the Fed was starting to focus on oil a couple of FOMC meetings ago because it appeared that inflation expectations had an anchored to the upside with that rogue preliminary University of Michigan, inflation expectations number turned out to be a bad data point and came back down. And I don't think the Fed is going to be focusing on oil or food because they're notoriously volatile. I think it was gonna be focusing on core inflation. And if core again can moderate levels, maybe three or 4%, and stay there, I think that opens up a runway for a pivot. But at this point, what we have so far that the Fed needs to keep, dig their heels into the ground and they need to stick with this hawkish narrative. Does the Fed need to push the economy into recession in order to get that inflation down to where they're comfortable? Can that happen in a soft landing scenario? If they want to get all the way to 2%, they're going to need to cause a recession. Given where, how tight the labor markets are at 3.5%. This matches 50-year lows and the unemployment rate. Again, we talked about wages earlier, which is a key source of demand which Stokes inflation. In order to put the genie back in that bottle, you need to cause a recession. But if the Fed says they're comfortable living with a 3% or three-and-a-half percent inflation rate a little bit higher than what they wanted. But again, if they're comfortable with that, I don't think that they have to cause a recession and we can have a soft landing scenario. Interesting, by the way, we have some comments. We look at this labor market and then you have ordinary people kinda putting their finger in the air and saying, Hey, we're getting some comments on Twitter from vignette, DiAngelo and Chester van says that's 500 thousand people taking second jobs in order to afford gas, food, and rent. ****, yeah. Anybody just filled up their car. It's like it takes your breath away still are their truck and chest are saying just us working folk taking more jobs to pay the bills. Nothing to see here. I mean, there is that isn't there that are these sort of the, the gains in labor and employment that they look to be from the headline? Or is this just people because of the high cost of living and inflation, just having to work more part-time jobs at your jobs coming back out of retirement in order to make ends meet? Probably a little bit of both. If there's probably an element there. If people getting a second job in order to live in these high inflationary types of environment. But again, I still think the labor market is strong at this point. I just think it's not as strong as what we saw today with that print, given the deviations that we talked about with the household survey, with the jobless claims data as well. There's a lot of data points that are suggesting that that may be a bit of an outlier. And as we get to a recession and this data is revised, it may be a much lower number than what we're currently showing at the moment. But nonetheless, I do think inflation is party playing a small part in that distortion. So we're in a situation where there is. You just mentioned the Fed is hawkish and this number is going to keep them hawkish. And we're trying to figure out where that demarcation line is, where they feel comfortable that they can make a pivot. And so Joe is asking, should investors with, against that backdrop, that framework, should investors stay defensive with equity exposure or should they take on more risk? I think this is the $1 trillion question. And is this a bear market rally or is this something that's a durable low? And in my opinion, I think that this is a buret market rally. I think the markets are a little bit too optimistic now in thinking about this bear market in particular, bear markets have two phases, whereas phase is multiples contract. So PE levels come down. And that happened. Pes went from 21.3 times forward earnings coming into the year dropped down to around 16 times forward earnings. The second component is earnings expectations coming down and we've just started to see earnings expectations come down on 2023. It's down about 3%. But I think that's a very optimistic number given the fact that I think we either going to have a material slowdown in the economy or we're going to have a shallow recession. And looking at the last three recessions, earnings have come down on average, closer to 25%. So I think that's too rosy. Expectations are embedded into the markets and that needs to be priced. Even though this has been a tremendous six weeks and the markets are getting more optimistic about a soft landing. I think at the end of the day, earnings are too rosy in either event, whichever path that we go, and I see some market pressure as we move later in the year. So do you favor bonds then? Where do you see opportunity? And Joe's asking what sectors look attractive to you? But should we be asking what assets look attractive here? Well, from a sector perspective, you've seen this bounce and cyclical Is that what's going to happen? There was a lot of negativity price there. And now with return of optimism of a soft landing and a dovish fed pivot. It's not surprised to see those areas rebound. But I think as we look out on the horizon from a market or sector perspective, you want to be allocated to more defensive areas of the marketplace. Traditionally, consumer staples and health care are the best-performing sectors in a large slowdown in economic activity or recession, utilities tend to do well even though they didn't do very well in the 2001 recession. So those would be the areas that I'd be looking for and really focusing in on quality companies, companies that have a high level of visibility on their earnings, strong balance sheets don't need to access capital in this type of markets. From an asset class perspective. I think growth overvalue. And you've seen that relationship or exert itself over the last three months with growths on the large-cap side outperforming by about 5%. But again, bonds, you want to be really allocated more towards governmental bonds. High-quality bonds even had very strong rally in high yield and some of the riskier areas of the bond market. But again, pricing and an optimistic scenario. So there's, there's areas of opportunity, but I think you really want to be thinking defensive at this point. Bonds have been tricky having a, because we've heard people try to make that bond call and it's been a rough road. Do you see more clarity ahead? It's not gonna be a straight line today. And if we get a hot inflation print, you can certainly see the 10-year Treasury and some more headwinds for bonds from a duration standpoint. But again, thinking about how much oil and food have dropped here, I think we're going to see a peak of inflation is going to come down in a pretty material way. And if you're going to have a potential recession, I have a hard time believing that the ten-year treasury is going to levitate or move a lot higher from here. So I think the path of least resistance for the ten-year treasury, even though you've had a rebound here is down from here. Robert, through echoing you on YouTube, say the only reason why inflation is down is due to the cost of energy dropping. Nothing to do with these small rate hikes. Again, I think a lot of people are wondering, it's such a blunt tool that the Fed has. What are the, what are the risks that they just, they over, they overdo it. You know, they just, they just hike rates too long, too far and cause more pain to the economy than they even would like to. If we think they're trying to engineer a soft landing, they don't have a great track record at that. You know, what is the what is the probability that they overstep? If you look at the last 13 primary fed tightening cycles since 19553 events, soft landings. So history is not on the Fed side. And if this tightening cycle goes forward as what's being priced today, 3.6% Of rate hikes in the first year of this fed tightening cycle. This would be the second fastest start to a Fed tightening cycle since 1955, only trailing 1980 when Volker had to break the back of inflation. And given the fact that they're tightening into a slowing economic backdrop and the lagged effects of monetary policy. And they're doing quantitative tightening also. This all leads to a very strong possibility of a policy error. But if you listen to the panel and you listen to the Fed, and inflation is enemy number one at this point. And they're more than willing to risk or recession in order to maintain their credibility and restore price stability. So short answer to your question. I think there's a strong possibility of a policy area here. Yeah, We tend to be we're coming right out at the end of the US close so obvious that we're focusing on US markets. Can the US economy do well if the rest of the world does not mean we have Europe looking just in dire straits going into this and the ECB just warrant of their warning about what's ahead. And we know the fuel situation where the BOE warning of a very long protracted recession in the UK. We know China is growth is slowing. We think maybe even more than they're admitting. I mean, can we be the only country growing well, I mean, don't we need the rest of the world to contribute? Well, there's an old adage out there when the US gets a cold, the rest of the world gets the flu. So when we get a hiccup in economic activity causes a global recession. No other country outside of the US has caused a US recessions. So while a lot of some of the US economic activity is dependent on exports, vast majority of us second activity is from the consumer. So we're relatively insulated economy. So even if you are seeing a slowing growth impulse and you have a recession in Europe. And let's not forget, Europe had a recession in 2011, the US continued to grow. I don't think that that's going to materially alter our prospects of a recession and thinking about a soft landing, Maggie, there's a very plausible path to that. Maybe the US consumer is less interest rates than they have been historically. Household leverage is that levels last seen in the early 1970s. And over 90% of Americans have fixed rate mortgages, right? Very different situation than what you had in 2007 when about half of the country had fixed rate mortgages, maybe businesses will be reluctant to let go of their employees because the scarcest commodity of this cycle has been labor, right? You're seeing a pickup of initial jobless claims, but maybe it doesn't move a lot higher from here, especially considering that margins have just started to come down. And it usually takes about three years from peak margin to the start of a recession. And it's been two-quarters. So again, our base cases or recession, but we do see a very plausible path to a soft landing, but it's becoming more and more narrow as the Fed moves on this hawkish path. It's so funny, Jeff, because it's your base case is the recession, but you just gave a really compelling argument for a soft landing. It's the best one I've heard. There's certainly a path. But telling me about that, That's a really great stat about the fixed mortgages. I haven't heard anyone say that, and that's a really interesting point. So half of Americans are on a fixed mortgage now. And what was it back in the financial crisis? Is it because everyone was on those, those all those different kinds of they got roped into those floating rate mortgages. Yeah, back in the housing crisis was 50% of Americans had a fixed $0.50 per cent were variable. So as rates move to higher disposable income, the shrank right today, it's over 90% of Americans have a fixed mortgage. So the only people really being affected by higher housing markets are people who just bought a house or that 10% that again, are going to reset higher with higher mortgage rates. And also the one thing I'll mention that I think is really important from the housing market perspective, is the biggest asset for the bottom 60% of American households. What their house, right? And continues the home price appreciation right now. Because of this market sell off its disproportionately hurting the top 20% of American households. And those are the same households that have the lowest propensity to spend an extra dollar, they're spending patterns are pretty consistent. So again, kinda thinking back to the soft landing scenario, I think maybe the consumer is a little bit less interest rate sensitive than what we've seen and maybe able to weather the storm with the Fed tightening cycle and get to a point where inflation is at a much lower level. That's so interesting, Jeff, and we were, by the way, again, the team we were slacking about mortgage rates because they've had a huge move. But again, if your point, if you're on a fixed mortgage rate is less of an issue. Very, very tough if you're in the middle of trying to close on at home. I feel for you all if you're out there doing that, I'm Jeff, this has been such a fantastic conversation and we're going to keep coming back to these themes about growth and inflation. Because this is a really important period we're in. We're doing a lot of work on the Academy, helping everyone get your framework right. So under this scenario, if you think there's going to be a recession, what do you do? You gave us some great tips on that. If you think it's a soft landing and you just gave us some good ideas about why that might happen, then you're going to be looking at different things and plug-in your time horizon to that. It's going to be supercritical. So thank you so much for helping us sort of dig into that jobs number and try to make some sense of it, Jeff, We appreciate it. My pleasure to be here. Thank you. Fantastic. By the way, I'd love to get feedback from everyone listening about what you think about that fixed mortgage rate. And are you hearing anyone concerned about the rise in mortgage rates or is everybody seem seem pretty good about it? I think that's a really fascinating conversation that we're going to have to continue. Appreciate any feedback you're hearing from the folks in your networks. Jeff, have a fantastic weekend. Everyone out there listening, enjoy yourselves. Stay cool, stay hydrated, and we'll see you back here Monday.