Get Hyped for Disappointment
In this issue of the peel:
Market Snapshot
Banana Bits
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Macro Monkey Says
The Previews
While everyone else is losing their minds over the return of football season, we have something way more fun and sexy to look forward to heading into this weekend.
The August jobs report drops at 8:30am today.?
Based on the labor market data we’ve already received this week, I can only expect the results to come in even worse than my fantasy team looks heading into the season.
Let’s get into it.
The Numbers
So far this week, the Bureau of Labor Statistics and the nation’s largest payroll provider, ADP, have been hard at work getting markets fired up for August’s jobs report.
ADP wasted no time bringing disappointment. According to the firm, private employers added 99k jobs last month.
That’s the lowest number of additions since January 2021 and comes on the back of a downward revision to 111k additions in July. I don’t know who’s getting paid to issue these forecasts, but analysts had expected ADP additions to clock in at 140k.
The labor market is clearly off its previous steroid regiment, as nearly all labor market data in recent months has become substantially weaker.?
Given that recession risk has overtaken an uptick in inflation as the #1 thing keeping economists awake at night, bad news is officially bad news once again.?
Despite the bad vibes, only three sectors actually registered net job losses. Professional and business services lost 16k, manufacturing lost 8k, and information technology shed 4k roles.
Other data observed this week attempted to get the labor market fired up again. Initial jobless claims for the week ended August 31st declined by 5k to 227k from the prior week and came in below estimates for 230k.
The 4-week rolling average of total jobless claims also declined by a cute little 1,750. As a heavily memed farmer would say, “It ain’t much, but it’s honest work.”
However, the August JOLTS report (Job Openings and Labor Turnover Survey) quickly brought the vibes back down.
Job openings barely budged in August, clocking in at 7.7mn. But, the job openings rate hit a fresh low at 4.6%. Hires spiked… higher, but so did total separations.
And it only got worse from there. Digging into the data, the number of job openings per unemployed person fell even further, setting a low not seen since April 2018, excluding the few months following the onset of that slight, mild global pandemic.
Historically, total job openings falling below the total unemployed population haven’t been much of an anomaly in the U.S. However, like everyone’s favorite Jeopardy! category, it’s all relative.?
As always, it’s not about good or bad but better or worse. Although Fed Chair JPow so nicely said, “We do not seek or welcome further cooling in labor market conditions,” further cooling in labor market conditions has made itself right at home.
The Takeaway?
The labor market is turning into the economic boogeyman—everyone's talking about it, but no one seems able to stop it.
We’ll get the official confirmation today, but the writing is on the wall. The Fed’s delayed loosening of monetary policy has created an environment that has made the labor market unnecessarily weak and increased the risk of recession.
This is par for the course under the Powell Fed. With everything besides their pandemic response, the Fed has been behind the curve.
While this hasn’t caused catastrophe yet, an overly nerdy reliance on data has certainly increased the odds.?
That’s why rather than looking at data, I go to my favorite source and just make sh*t up. Maybe we should hire a DJ as our next Fed Chair so they can read the vibes.
What's Ripe
G-III Apparel Group (GIII) 22.00%
Tesla (TSLA) 4.90%
What's Rotten
Frontier Communications (FYBR) 9.51%
C3.ai (AI) 8.21%
Thought Banana
Uno Reverse: The Yield Curve
Red moons, black cats, and the yield curve inversion—some of history's most famous bad omens.
As scary as they all are, only the last of that list has the potential to devastate us all in the worst manner imaginable—by causing losses in my portfolio.
Personally, I don’t need any omens to lose money. But, for the rest of you apes, shifting yield curve dynamics are certainly something you’ll want to pay attention to.
What Happened?
The yield curve is simply a line chart that plots the yield of fixed-income assets from a given issuer on the Y-axis with varying maturities across the X-axis.
Usually, when someone says “the yield curve,” they’re referring to that of the U.S. Treasury. It looks like this:
Exciting stuff, huh?
Yields change constantly throughout the day, so the shape of the yield curve is in constant—but usually mild—flux.?
Generally, a healthy yield curve is one that’s shaped like the incline of a roller coaster. Longer-dated maturities ought to carry higher yields because of the added risk investors take by holding assets for a longer period.
However, as any 1st grader could tell us, that is not the case in the above image.
An inverted yield curve is one in which longer-dated yields are below that of shorter yields. Most of the time, when someone says “the yield curve inversion,” they’re referring to the spread between the 10-year and 2-year notes.
That’s because the 2-and10-year yield curve has a storied history of predicting recessions. For the vast majority of the team, an inversion of these two maturities signals a recession is on the way. Just take a look at the below chart:
As you can see, the yield curve has been inverted since the spring of 2022, the longest constant inversion on record. However, as of last Friday and then again on Wednesday, the yield curve was uninverted as the 2-year yield fell below that of the 10-year.
Then, it inverted again on Thursday. But that’s not the point.
It’s not uncommon for recessions to begin immediately after an inversion. That might seem counterintuitive, but as the odds of a Fed rate cut increase, traders bet on falling yields, pushing short-term rates lower.
And why on Earth do we think the odds of a Fed rate cut would increase? Because a recession is on the horizon.
The Takeaway?
With the yield curve flip-flopping between inversion and uninversion, like a politician adjusting their message to the crowd, recession warnings are getting as loud as a politician's campaign promises.
As we said above, tomorrow’s jobs report will give us a key update on the state of the economy through the lens of the labor market. Stay tuned.
The Big Question: Is the U.S. economy about to enter a recession? If so, how bad and how long can we expect this one to be?
Banana Brain Teaser
Previous
A survey of employers found that during 1993, employment costs rose 3.5%, where employment costs consists of salary costs and fringe-benefit costs. If salary costs rose 3% and fringe-benefit costs rose 5.5% during 1993, then the fringe-benefit costs represented what % of employment costs at the beginning of 1993?
Answer: 20%
Today
Items that are purchased together at a certain discount store are priced at $3 for the first item purchased and $1 for each additional item purchased. What is the maximum number of items that could be purchased together for a total price that is less than $30?
Send your guesses to [email protected]
?
Buy when there's blood in the streets, even if the blood is your own.
Baron Rothschild
How Would You Rate Today's Peel?
?? Meh
?? Rotten AF
Happy Investing,
David, Vyom, Ankit & Patrick