The Breakdown - Macro Weakness Paves the Way for Another Fed Rate Cut

Episode Date: November 5, 2024

NLW covers the surprisingly weak jobs report along with other macro signals pointing to more rate cuts on the horizon. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to 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 Monday, November 4th, and today we are talking macro. Before we get into that, however, if you are enjoying the breakdown, please go 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. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, the election is at our doorstep. Bitcoin is unfortunately down again under 70,000, trading at the time of recording at around 68,400. But today we are catching up on

macro news, given that we got some really interesting data at the end of last week. October's jobs report showed the worst month for the labor market since late 2020. Just 12,000 new payrolls were reported, a huge miss from the 100,000 consensus estimate. The Bureau of Labor Statistics noted this survey was conducted during the aftermath of Hurricanes Milton and Helene, and was also impacted by the Boeing strike. The BLS estimated that 44,000 striking workers were absent from payroll data for the month. The effects of the hurricanes were a little more mixed. The BLS said that, quote, initial establishment survey collection rate for October was well below average. However, collection rates were similar in storm-affected areas and unaffected areas. They were open to the

idea that hurricanes had affected the numbers, but said it was not possible to quantify the net effect. However, the BLS noted a shorter-than-average window for data collection may have been a factor in the low numbers. These comments were related to the establishment survey, which draws data from companies to determine the number of payrolls in the economy. The other half of the report, the household survey, which determines the unemployment rate, was reportedly unaffected. Unemployment remained flat at 4.1%, still a historically low number. A broader unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons was also unchanged at 7.7%. Many then are treating this as a neutral report due to the distortions from weather and

strikes. It doesn't support the theory that the labor market is heating back up, nor does it clearly tell a story of further deterioration. Corey Stahl, an economist that indeed said, at first glance, October's jobs report paints a picture of growing fragility in the U.S. labor market, but under the surface is a muddy report roiled by climate and labor disruptions. While the impacts of these events are real and should not be ignored, they are likely temporary and not a signal of a collapsing job market. Now, alongside October's murky numbers, this report also featured a major downside revision for previous months. August was revised to just 78. thousand additional payrolls while September was trimmed to 223,000. In total, this was a reduction

of 112,000 jobs from the initial reports. This follows consistent downward revisions to payroll data that we've seen over the past year. These revisions have become so consistent that Fed economists are now baking them into their models. This set of revisions flips the past two months from showing stabilization and recovery to a continuation of the downwards trend that began in April. Felix Jovin, the host of Forward Guidance tweeted, With the downward revision tilt and play, it's entirely likely we saw a negative jobs print. Indeed, digging below the surface, there are some clear signs of weakness. Temporary workers saw a decline of 49,000 payrolls for the month, and this category is typically

viewed as a proxy for the health of the labor market as firms take on temp workers in expansion and cut back in contraction. This segment of the labor force has now seen a decline of 577,000 since March 2022. The household survey also showed a fairly bleak picture, with 368,000 fewer people reporting holding jobs, with the labor force contracting by 220,000 due to discourage workers and retirements. Full-time employment declined by 164,000, while part-timers fell by 227,000. If the establishment survey converges to these numbers, as we've seen over the past year, then it's extremely likely the labor market is heading backwards. The sectors that are still growing at the fastest rate are health care and government workers with 52,000 and 40,000

respectively. This means private payrolls are already in decline if the noisy data is to be believed. However, the expansion of government work is a clear trend. Government workers have now increased by 188,000 since March, and now represent around 14% of the total U.S. labor force. James E. Thorn, chief market strategist at Wellington Alta, said, in an economy where full-time jobs have dropped by over a million in the past year amid downward revisions of BLS data, it's challenging to argue that the private sector is thriving or even robust, especially with close to 500,000 government jobs added. Basic economic theory warns of the long-term consequences of the public sector crowding out private enterprise, a phenomenon currently evident in the U.S.

With unsustainable fiscal deficits and a debt-to-GDP ratio of 125%, it's astonishing that certain pundits continue to assert that all is well. To objectively assess the data and still conclude that the U.S. economy is robust is nothing short of folly. Still one of those pundits that believes all as well is economist Mohamed Al-Aryan, who said, on the whole, I think the data are consistent with an economy that is still robust and an inflation rate that is proving somewhat more sticky than you would like. Regardless of whether you agree with that assessment, Al-Aryan had a prescription for the Fed that seems supported by all possible interpretations of the data. He said,

This is a major call for the Fed to exit this notion of fine-tuning and go into a world where it has a steady steer on interest rates. It should be cutting by 25 basis points for the next few meetings. It should not be looking to react. It should be steady because this data is going to be noisy, and that's what happens at inflection points. And indeed, this seems to be the consensus. A 25-bases point cut is fully priced in for this Thursday's Fed meeting with another single cut, basically a lock for December. Chief U.S. Economist at T.S. Lombard said of this job's report,

it removes all doubt that you are going to get a 25 basis point cut in November and another 25 basis point cut in December. Blitz expects the Fed to cut once more in January to arrive at a range of 4 to 4.25% before considering a pause. He further noted, the Fed is going to take these downward revisions to August and September seriously. We're not yet in territory where the labor market is clearly contracting, but the data suggests expansion is grinding to a halt. The private sector is looking decidedly weak, setting aside one-off events, the trend is down only. Partisanship is playing heavily into the analysis heading into this week's elections, with many suggesting this report is an indictment of biodynamics. Even progressives struggle to find a

positive spin for these numbers. Employ America's Skanda Amernath noted that prime age employment has completely stalled out, tweeting, October's prime age employment weakness might also be related to hurricanes and one-offs, but it bears monitoring from here. We're still at high employment levels, but clearly flatlining. We should have a better view of the labor market in next month's jobs report and ahead of the December FOMC meeting. For the time being, it would be wise for the Fed not to get locked into any specific assessment of the labor market. And this is essentially the main takeaway. None of the macro data over the past month have provided the Fed with the information they need to change policy. The last inflation print was sticky but didn't suggest another spike. And the Fed has

made it clear that they don't see inflation risks coming from the labor market, so there's absolutely no reason to slow down rate cuts for the time being. The other big macro data point from last week was third quarter GDP growth. It came in at a 2.8% annualized pace. Healthy but a slight slowdown from the 3% pace in Q2. The big story was continued. strengthened consumer spending, which accelerated to 3.7% annualized growth. Consumer spending contributed 2.46 percentage points to growth the highest proportion in 1.5 years. Jay Bryson, chief economist at Wells Fargo, said, households continue to face their fair shares of challenges with still high prices at the top

of the list, but that doesn't appear to be deterring them from spending. Final sales to domestic purchasers, a measure that strips out foreign trade, inventories, and government spending was also turning along at a healthy 3.2% growth rate. In a research note, high-frequency economics said, There is almost nothing wrong with this picture. Steady normalization of rates at a moderate pace is what the economy needs, nothing more. Still, there are broadly two warning signs that mark this otherwise positive report. Government spending is still surging at 5% annualized pace, the largest increase since 2021.

This was largely driven by growth in national defense expenditures, which increased at a 14.9% pace over the past year. Large increases in government spending aren't necessarily a bad thing, especially if the alternative is a recession, but to a certain extent these figures suggest the economy is reliant on government-led growth, which many believe is unsustainable. The other issue is that consumption-led growth is bifurcated across society. Bloomberg economist Eliza Winger said, the headline GDP print for Q3 makes the economy look strong, but beneath the surface,

things are less stable. Consumer spending, the main growth driver has been narrowly boosted by upper-income households, while lower income ones have grown more price-sensitive. Regardless of how the growth is being generated, the clear point is that there's nothing that looks like a slowdown in the current data. Tom Porcelli, chief U.S. economist at PGIM Fixed Income said, Where it counts, growth performed incredibly well in the third quarter. It's very hard to really practically think of having a recession over the near to medium term. The U.S. has now had six

straight quarters with growth above 2.5%, which is its longest stretch since 2006. Another remarkable point is that the U.S. is one of very few countries producing strong growth at the moment, along with India and China, to the extent those numbers can be believed. The U.K. and most of Europe are struggling along with growth below 1%, while Canada and Mexico are below 2%. Ben Carlson of Ritzholt Wealth Management tweeted, unemployment rate 4.1%, inflation rate 2.4%. 10-year treasury rate, 4.3%. Real GDP growth, 2.8%. If there is such a thing as a sweet spot for the economy, we're basically in it now. Still, El-Gato Molo thinks it's all a bit too good to be true, tweeting, Wow, a massive spike in government spending and government debt to goose GDP from 1.9% to 2.8% to deflator also looks a bit fishy and would juice the real GDP figure. To the extent that there's

any sign of problems in the economy, it's showing up in the bond market. Despite macro data clearing the way for another Fed cut this week, 10-year treasury yields continue to head higher. The 10-year is now at 4.4% up from 3.7% at the beginning of October. Usually yields come down during the cutting cycle, however due to yield curve inversion, long rates are still below the level of Fed funds. The move is entirely idiosyncratic to the U.S., not noticeable in other sovereign debt markets aside from the U.K., which has its own set of clear drivers. There's also been a confusing move in the corporate debt markets, with credit spreads tightening with near record lows. This would generally suggest that default risk is reducing but taken together it paints a strange picture.

Perhaps unsurprisingly, then, explanations are extremely varied. Bloomberg opinion writer Marcus Ashworth thinks this is just about hedging election risk, writing, what is notable in the past month is a rise in the cost of buying downside option protection, alongside with pressure in the repurchase markets. That indicates not only an increase in portfolio hedging, but also short positions being put in. Bon market volatility is the highest since late last year, but this may shelve off sharply post-Nove 5th. Deerpoint Macro commented, market preparing for a Trump win, expectations of higher deficits and tariffs pushing up the tenure. Republican sweep expectations are higher tariffs and higher inflation. We're seeing the in-rates options as well,

with bets being on higher long-end rates. Andy Constant of damp spring research believes the bond market vigilantes are preparing to rein in government spending, writing, We think the risks are high that the consequences of next week's FOMC will be the Fed losing the long end of the bond market. We're neutral on bonds at the current prices, but frankly believe the bond market is warning the Fed that unless it reacts immediately to address bond market concerns, the risks are great. Still beyond the doom saying, some are considering that the bond market could simply be pricing

in good times ahead. Financial writer Adam Gallus tweeted, according to Moody's, the 10-year Treasury yield averages nominal GDP over time, so GDP plus inflation. Rising GDP expectations from a lack of recession combined with higher inflation expectations explain rising bond yields. Ultimately, regardless of the cause, the amount of volatility feels unsustainable. Dr. Stocks tweeted, the move index tends to be inversely correlated to stocks. There's been decoupling recently, so something has to give soon, either a crash in stocks or a big squeeze in bonds. From where I'm sitting, I think it's going to get a lot clearer after this election, however clear

that election is. And so I will, of course, be back to share all that with you as it has. happens. For now that that is going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.