The Breakdown - Is A Fed Pause (Finally) Coming?

Episode Date: June 2, 2023

On today's episode, NLW digs into the macro landscape. Specifically he looks at how tightness in the labor market has justified continued Fed tightening, but why the numbers aren't telling as clear a story as they once were.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Friday, June 2nd, and today we are asking whether a Fed pause is coming. Before we get into that, a quick note. If you were enjoying the breakdown, please subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. Well, today we are taking a turn on the the macro side, and there is no doubt just how tumultuous the last couple years have been for the U.S. economy. We, of course, first had high inflation, which led the Federal Reserve to conduct its

most aggressive rate hiking cycle and living memory, and because of that, the pain points have cycled through an overly strong dollar, crippling energy and fuel prices, and out-of-control food inflation. Now, one of the biggest narratives around this time last year was that the U.S. was on the brink of a recession. All the indicators were lining up, manufacturing indices were collapsing alongside consumer spending, and we even saw two consecutive quarters of GDP contraction in the first half of 2022, which is, of course, a technical definition of a recession. Still, through it all, labor markets data held up. In other words, people were not being laid off of jobs. In fact, there weren't enough people who wanted to work to go around. Now, fast forward

to this year, during the first half of the year, we found ourselves with many of the same indicators flashing recessionary signals. Manufacturing data has again rolled over and is showing multiple months of contraction in a row. Consumer spending remains robust in nominal terms, but credit card debt has skyrocketed, recently breaching $1 trillion for the first time, indicating that household balance sheets are being stretched to keep up. And yet still, labor market data remains robust. But that has now led some to question whether that data is really telling us the full story. The strong jobs market has been a constant worry for the Fed, who views a hot labor market as a potential driver of renewed inflation. As the rate hikes have

dampened enthusiasm and inflation across multiple sectors, the Fed's focus has narrowed to services inflation, driven primarily by wages as the sole remaining reason to keep hiking. Fed Chair Jerome Powell has repeatedly pointed at the labor market as his reason to continue pushing up rates throughout the past year. More recently, however, his language around the hot labor market has softened. Over the last few months, the Fed has adopted a data-driven approach, making decisions meeting to meeting based on the most recent data. But as we approach the June FOMC meeting, this data-driven ideal is broken down, with bank failures and the associated credit contraction muddying the waters. At recent press conferences, Powell has even begun to openly

discuss his distrust of staff modeling and forecasting. All of this begs the question, what is a data-driven central bank to do if the data is no longer useful? Now, on Wednesday of this week, the Bureau of Labor Statistics released its job openings in a labor turnover survey or jolt's results for April. The headline numbers told the story of a robust labor market, that continues to exceed expectations. Job openings, the primary measure of labor demand, increased by 358,000 to reach 10.1 million. This represents 1.8 job openings for every unemployed person. Powell has been consistently citing this ratio as the main reason he believed the labor

market was still too hot, and his main justification for a continuation of rate increases. Job openings data for March was also revised up by 160,000 positions, indicating that the labor market was even tighter than previously measured. These numbers came in vastly beyond analyst's expectations, with economists polled by Reuters forecasting a small decrease in job openings for April at $9.375 million. There were concerns that a rise in layoffs in March could be the start of a worrying trend, but a decline of 200,000 layoffs for April put those fears to rest. Elise Gould, senior economist at the Economic Policy Institute said,

We were pleasantly surprised layoffs fell down closer to February levels after rising in March. There's very little to indicate the labor market is cooling on. Still, beyond the headlines, some cracks were beginning to show. Quits are down from 2.5% to 2.4% of the overall labor force in March. While the level is still elevated compared to the previous two decades, this is now the lowest portion of the labor voluntarily leaving their jobs we've seen since March 21. The quits number is typically seen as an indication of how confident workers are that they can leave their current job to find a better opportunity. New hirings also continue to slide, hitting 3.9%. That's the lowest number recorded since December 2020.

The point is that these figures don't tell the story of a robust and strengthening labor market. They show one in which both workers and hiring managers are less confident. So what's really going on in the labor market and which trend should we believe? Some economists are skeptical that the Joltz report gives an accurate picture of the situation. There are a number of reasons for that. Responses to the survey have been declining for a decade, where the BLS used to manage a response rate above 60% in 2017, that figure has now collapsed to around 30%.

Goldman Sachs economist Ronnie Walker suggested that low response rates could be impacting the accuracy of the data, with a larger portion of the data being extrapolated from a smaller sample size. He pointed out that alternative measures of job openings from online platforms link up and zip recruiter have shown a precipitous drop over the last year. Now, that data also does have an obvious bias towards firms that have a more significant online presence, and so Walker ultimately concluded that, quote, we suspect that the true level of job openings lies somewhere in the middle of the range implied by jolts and alternative measures of job openings. Julie Pollack, chief economist at ZipRecruiter,

concur that the labor market may not be as strong as the top-line figures indicate. She said, this suggests that the labor market is slackening despite the reported increase in job openings and that workers are increasingly sheltering in place in their jobs as better alternatives become less available. The conference board, a think tank which conduct studies around employment data, confirmed the reduced worker sentiment indicated by a lower quits number. Its latest survey showed the share of workers reporting that jobs are plentiful dropped last month to its lowest level since April 21. Jeff Snyder from Eurodollar University wrote, Joltz quits dropped to lowest level since March 21. Workers are getting less and less confident about job opportunities,

not quite the same picture from job openings. Adam Taggart, the CEO of Wealtheon, responded to Jeff and said, as I predicted over a year ago, the Great Resignation is metastasizing into the great please may I have my job back movement. Now the BLS has also updated some of its pre-referencing. previous data, and the figure which is catching a lot of attention from analysts is a massive downward revision in wages. For the fourth quarter, the BLS originally published that real hourly compensation adjusted for inflation had come in at a solid if uninspiring 0.7% increase on an annualized basis, thus struggling to keep pace with inflation. That number has now been revised down to a shockingly large 4.7% inflation-adjusted wage cut for the quarter.

Data across the board, in fact, has shown that U.S. income is failing to keep up with inflation. Gross domestic income, which is the counterpart to gross domestic product, has now shown two consecutive quarters of contraction. Quarter one GDI, which was released last week, showed a 0.5% contraction to a compound 0.4% contraction in Q4 of last year. GDI and GDP typically follow in lockstep, which makes sense when you consider that every sale in the economy, tracked by GDP, produces income for someone else in the economy. When compared to a 1.3% GDP increase in Q1 and 2.6% in Q4, something just doesn't add up. The gap between GDP and GDI is increasing and has rarely been higher.

And this gets us to today's non-farm payrolls report. Stephen Van Meter writes, The Fed really needs the NFP to come in soft so they have an excuse to pause in June. This is necessary to get money market funds to buy the deluge of T-bills that are about to hit the market. Will the BLS do their part? Stephen is, of course, talking about something that has been a big focus for this show recently, which is the potential impact to liquidity in the markets as the Treasury Department refills its coffers now that the debt ceiling deal is done.

Analyst AlphaPix tweets, Our thoughts on the non-farm payroll report due out at 830. The forecasted Bloomberg consensus of 190,000 jobs added, would be a fall on the previous April reading of 253,000. The range from surveyors is 100K to 250K. From the big hitters, JPMorgan are on the low side at 150K, with Nomura at 235K. The monthly and three-month rolling average looks likely to continue to move lower. We also flag up the chart showing that job openings for smaller companies is still elevated versus 2019 levels.

This indicates to us that there is scope for smaller firms to play catch-up in job cutting. As for other notes, the unemployment rate is seen to tick slightly higher to 3.5%, but still remaining around multi-decade lows. average hourly earnings is expected to moderate slightly too. There's currently just 10 basis points worth of hikes priced in for the June FOMC meeting, with this being the last major employment report due out before then. The bottom line? We think that any figures around consensus will reinforce the Fed pause,

rendering any hike in June and even July out of the question. Even if we get a beat in headline NFP, it doesn't change the broader trend lower. Unemployment will also struggle to meaningfully move any lower. On the other hand, a miss across the board will likely trigger a much, greater reaction, allowing the market to factor back in cuts later this year. We therefore feel the bias is skewed towards a USD sell-off and equity rally post-announcement. The Bloomberg headline declares, U.S. labor market sends mixed signals, giving Fed reason to pause. So here are the details. Non-farm payrolls increased $339,000 last month after an upwardly revised $294,000 advance in April.

That is significantly higher than the median estimate of $195,000. At the same time, the unemployment rate also rose to 3.7%. That's higher than the median estimate of 3.5%. Finally, while it wasn't by much, wage growth also slowed. And so this is where we get that idea of mixed results. On the one hand, the new jobs created was way higher than expected, but so too was the unemployment rate and wage growth also slowed. So how did it change expectations around what comes next for the Fed? From Bloomberg, markets reacted to the advance in payrolls with Treasury yields jumping after the report. Court. Traders up their bets of the Fed hiking rates by the end of July. Bets on a June hike also rose, though investors still leaned toward expecting a pause. But Bloomberg continues. For the Fed, however,

policymakers will also be looking at the surge in the unemployment rate, which was the biggest one-month increase since April 2020. There were 440,000 more people out of a job in May, also the largest monthly rise since the onset of the pandemic. Even though labor demand has remained resilient, it's unclear how long that will last. With the credit crunch, threatening to halt the expansion and more companies planning to let workers go, hiring and pay gains may slow substantially in the coming months. Now, this mixed result seems to match the mood of Fed speakers recently as well. Heading into the blackout period for Fed officials, the messages have also been decidedly

mixed. On Wednesday, newly appointed Fed vice chair, Philip Jefferson, laid out the argument for, quote, skipping a rate hike at a coming meeting. He suggested that a rate pause would allow the Fed to see more data before making decisions about the extent of additional policy firming. However, he was also careful to temper that suggestion, adding that, quote, a decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. Appearing together earlier on Wednesday, Fed Governor Michelle Bowman and Boston Fed President Susan Collins were much more hawkish.

Bowman warned that rebounding house prices could drive a fresh burst of inflation. Collins said that the Fed is intent on reducing inflation that's just simply too high. I don't know, man, this one is hard to make heads or tails of. My best guess continues to be that we do see a pause. I think that there is a sense that is starting to be more broadly held that even strong jobs numbers don't tell the full story. I think that the non-farm payroll report that we just got is a perfect exemplification of that. I would also expect Fed officials to, in some ways, if they are anticipating a pause, to increase their rhetoric around the fact that they are still leaving themselves open to increase rates again later. And that's kind of what

you saw with Collins earlier in the week. It's basically a situation of tough talk to make sure that you don't lose the narrative, even though you know your actions are going to be the type of thing that could drive a narrative in a direction that you don't want it to go. But then again, the Fed has so far lived up to their promise to keep hiking right in the face of everything else that's gone on. A banking crisis didn't stop them, and so maybe a little bit of increased unemployment won't either. Either way, we'll have more information next week. And until then, there will be endless market speculation about what is likely to happen. Anyways, guys, that is the macro view from here. Happy Friday. I hope you are looking forward to a great weekend. Until next time, be safe and take care

of each other. Peace.