The Breakdown - Market Whiplash as Jobs Report Undermines Powell’s Less Hawkish Speech

Starting point is 00:00:00 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. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, December 3rd, and that means it's time for the weekly recap. One note, before we dive into that, there are two ways to listen to the Breakdown podcast. You can hear us on the Coin Desk Podcast Network feed, which comes out every afternoon and features other great CoinDest shows, or you can listen on the Breakdown Only feed, which comes out a few hours later. Wherever you are listening, I would so appreciate it if you would take the time to leave a rating or a review.

Starting point is 00:00:47 It makes a huge difference, and I really appreciate each and every one of them. Now, for today's weekly recap, we are going to check in on some of the macro topics that all of the shenanigans in crypto world have forced us to not cover during the week. And where I'd like to start is with Jerome Powell's remarks on Wednesday, which were the second most anticipated comments of the day after Sam's New York Times conversation. So Federal Reserve Chair Jerome Powell spoke at the Brookings Institution on Wednesday, ostensibly to discuss the labor market, but also to clarify the path forward for Fed policy. Some commentators were of the opinion that the Fed chair would use the speaking engagement to talk markets down. This is something that we've been talking about all year, this micro cycle where markets start to get ahead of themselves, the Fed deploys a bunch of speakers to say, hey, chill out, sometimes using Powell himself, and then, yes, markets chill out. One of the most notable examples of this was the infamously hawkish Jackson whole speech in August, which cut short a relief rally in equities in just eight minutes.

Starting point is 00:01:48 What we got instead from Powell was much more moderate, largely seen as firming up the likelihood of a smaller 50-bases point rate hike at the December F.O. OMC meeting. The focus shifted to the anticipated higher for longer rates policy, with Powell saying, quote, the time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. End quote. Now, despite appearing to give his blessing to slowing rate hikes, Powell also expressed the need for more data before declaring victory in the fight against inflation.

Starting point is 00:02:30 He said, quote, it will take substantially more evidence to give comfort that inflation is actually declining. The truth is that the path ahead for inflation remains highly uncertain. In response to a question from a J.P. Morgan economist about whether he would take a shock and awe approach to rate hikes, Powell said, quote, I think we are in a position where the right thing to do is move really quickly as we have and now slow down and get to that place where we think we need to be. And by the way, there's high uncertainty around that. Now, turning to the main topic of the speech to the labor market, Chairman Powell fleshed out his view on the cause of tightness in the labor market and the gap in the participation rate. He said, quote, these excess

Starting point is 00:03:06 retirements might now account for more than two million of the three and a half million shortfall in the labor force. Powell said that the labor market is only showing, quote unquote, tentative signs of what he called, quote, unquote, rebalancing, stating that to be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2% inflation. In a market change from his rhetoric that there would be pain from prior months, Powell recognized the risk of inflation fighting rate hikes. We must get rid of inflation, but at a very high human cost. Reuters summed up the speech with its byline. Quote, the Federal Reserve has been pretty aggressive already with its interest rate hikes and won't try to crash the economy with further sharp

Starting point is 00:03:43 increases just to get inflation under control faster. The job openings report also released on Wednesday they showed some evidence of cooling in the labor market. With job openings and quits, a measure of voluntary job levers both declining. Still, before getting too excited about that, let's look at comments from former Treasury Secretary Lauren Summers. Today's Joltz report show a labor market that is cooling very slowly and will likely continue to be extraordinarily tight for some months to come. Job openings declined by only 350K last month, meaning we would need nine more months at this rate just to get back to 2019 levels. Overall, there are still 1.7 job openings per unemployed today, compared to 1.2 in 2019, and a historical average of 0.7. It's hard to see how wage inflation

Starting point is 00:04:24 can substantially subside with such an imbalance between labor supply and demand. Now, after Powell's comments, the S&P 500 soared nearly 4%. Nasdaq outpaced even that with a 4.5% rise. And all this is important because the Fed blackout period before this month's meeting starts on Saturday, so this was one of the last chances for Powell to deliver market guidance. And while the market had that strong positive sentiment, not everyone was convinced. Steve Leisman, a senior economics reporter at CNBC, said, I find Powell's outlook darker than it previously was. He seems to give almost no possibility for an early fall in inflation and has no faith in labor supply coming back. The only thing that will work to bring down inflation is slowing demand and growing labor market slack.

Starting point is 00:05:08 Mark Andre Fongren writes, why do some people not understand this? Fifty basis points isn't doveish, less hawkish, is still hawkish. Powell said they will slow down, but rates still have to go higher than intended. That's not a true pivot, and that's certainly not dovish. Ross Gerber says stocks are jumping on news that Powell read the paper and notice the economy is going into a recession. While Dylan Leclair from Bitcoin magazine said, if I was Powell, I would simply have stepped up, said steady lads, and then walked away from the podium. Now, speaking of jobs, this week we also got the payroll report. And as you might guess, the Fed will have been looking for any indicators of a softening labor market. Alas, last month,

Starting point is 00:05:45 employers added more jobs than forecast, and wages went up by the highest percentage in almost a year. Non-farm payrolls increased $263,000 in November. In October, the gain was an upwardly revised $284,000. Unemployment held at 3.7% because labor force participation went down. Importantly, in maybe the biggest number, average hourly earnings rose two times as much as forecast. Now, in terms of that top line number, 263,000 non-farm payrolls, economists had estimated that there would be about two 200,000 new jobs added. In terms of the labor force participation, 186,000 people left the labor force, leaving the participation rate at 62.1%, which is a four-month low. Among those 25 to 54, labor force participation declined for a third month in a row. Because of this, stocks took a lower

Starting point is 00:06:33 turn on Friday, as markets anticipate a more hawkish fed. In a note, Mizzouho economists said, quote, the net read is that the labor market is still far too tight and cooling only very gradually. It suggests that the economy is resilient and we can handle more rate hikes and restrictive policy for longer. Economist Anna Wong and Eliza Winger wrote, The resurgence of average hourly earnings growth shows labor shortages are still pressuring inflation, pushing back against the idea, supported by a few Fed officials as indicated in the November FOMC minutes, that wage growth is cooling fast. Given the slow adjustment in the labor market,

Starting point is 00:07:06 Fed officials will likely have to raise their terminal rate forecast from what they wrote down in the September dot plot. Even gloomy or Harvard economist Jason Furman said you probably want to revise your views on inflation, and its overall dynamic more based on today's jobs report than any other data reported this entire year, and not in the favorable direction. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. NXO is a company that has never put the safety of clients' funds in question. With over 50 global licenses, $775 million in insurance, and a real-time audit of custodial assets, nexo sets an example for security standards in the industry.

Starting point is 00:07:49 Apart from keeping their 5 million clients safe, Nexo has kept building. They've just announced their non-custodial smart wallet. Visit nexo.io. That's nexo.io and sign up today. This episode is brought to you by Circle, the sole issuer of USC and a leader in crypto that's held to a higher standard. USDC is a fast, safe, and efficient way to send money around the globe.

Starting point is 00:08:14 USDC is always redeemable one-to-one for U.S. dollars and has over $45 billion in circulation as of October 13, 2022. Plus, Circle posts weekly reserve reports and monthly attestations of reserve capital, letting users know that USDA is safe, transparent, and compliant with regulations. Just go to circle.com backslash transparency to see why USDC is a trusted staple coin. As one of the largest, longest-lasting, and most secure exchanges, Cracken continues to set the industry example for transparency and trust. Regular proof of reserves audits verify your balances are backed by real assets. Industry-leading security keeps your funds and information safe.

Starting point is 00:08:58 And award-winning client engagement teams are available for support 24-7. Buy crypto instantly with fast, flexible funding options on Cracken. Download the Cracken app on Google Play or the Apple App Store. Or visit crackin.com slash breakdown to join. Now, some are noticing that there are also weaknesses in this jobs data. In the household survey, employment is actually down 138,000 jobs. The trend seems to be people taking on additional part-time jobs to make ends meet, which is obviously not a great situation. But net net for the Fed, it still likely means more hawkishness. And when it comes to the idea that economic data is

Starting point is 00:09:38 showing that the economy is doing fine and can handle more tightening, there are some other indicators as well. According to recently released data from the Commerce Department, consumer spending, which represents two-thirds of U.S. economic activity, remains strong in October, rising by 0.8%. Despite inflation's still running hot at more than 7%, even inflation-adjusted spending rose by a robust 0.5%, which is the largest increase since January. Christopher Rupke, the chief economist at Forward Bonds in New York, said, quote, The consumer is alive and well. Right now, even if consumers do not buy anything more in November and December, real consumer spending is running well above normal and in no way, shape,

Starting point is 00:10:14 perform looks like a recession. Breaking apart the data, spending on consumer items remain strong, but spending on durable goods, homes and autos continues to decline. Importantly, use of consumer credit and buy-now pay-later schemes remains at high levels. Household disposable income after adjusting for inflation increased by 0.4%, failing to keep up with spending and driving the savings rate down to 2.3%, which is the lowest level since July 2005. Tim Quinlan, a senior economist at Wells Fargo Securities, questioned the sustainability of these trends. Each month that consumers forfeits saving for the future in order to sustain a rate of spending that exceeds their income, he wrote, the more it densed their ability to weather the coming

Starting point is 00:10:53 storm. Still other economists suggested that the savings rate was merely normalizing, with many households spending down excess savings accumulated over the past two years. Scott Hoyt, a senior economist at Moody's analytics, said, quote, only a portion of the excess savings accumulated in the first year of the pandemic has been spent. Credit is also available for many despite becoming more expensive. Now with all this, strong consumer spending is driving high predictions of growth for the fourth quarter, despite recession fears. Estimates of U.S. growth are currently at 2.8%. Down only slightly from the 2.9% growth recorded in the third quarter. Alongside consumer spending data, the Fed's favorite inflation data, the personal consumption expenditures price

Starting point is 00:11:30 index or PCE for October, was also released this week. It showed a 6% inflation rate, which was the smallest year-on-year gain since December of last year. Core PCE, which strips out food and energy climbed 5% in the year ending in October, down from 5.2% in September. There is some trouble starting to show up in the Institute for Supply Management's data, however, which showed a contraction in the manufacturing sector for the first time since May 2020. The contraction was slight, not quite to the levels which indicated recession, and most manufacturers blame softening demand for goods and pointed to uncertain economic conditions ahead as the reason for decreased demand. Now, if all of this points to a better-than-reported

Starting point is 00:12:08 economy, sentiment is kind of in the trash. The Federal Reserve's beige book is a co-related survey of business sentiment. The latest edition released on Wednesday showed mixed feelings about the near future of the economy. The report captured responses gathered throughout October in early November and showed, quote, interest rates and inflation continue to weigh on activity, and many contacts expressed greater uncertainty or increased pessimism concerning the outlook. Economic activity posted modest gains in half of the central bank survey regions, while the other half show slight to modest declines. Consumer prices rose at a moderate or strong pace in most regions, while inflation was expected to hold steady or moderate further. Labor market problems, which until

Starting point is 00:12:47 recently had been showing up as difficulty with hiring and retention, continued to ease but were still described as tight. Quote, business activities slowed modestly in recent weeks. Still firms continue adding to their payrolls and stiff competition for workers kept upward pressure on wages. Input cost increases remain widespread. Overall, the Bejewbook told a story of a slow economic growth, and a slightly pessimistic sentiment, but with most firms reluctant to reduce workforce due to anticipation of difficulty rehiring employees. Now, what about outside of the U.S.? Business surveys released in late November painted a picture of a slowing global economy, but nowhere near as bad as some economists have feared. The responses showed declines in output across the U.S.

Starting point is 00:13:27 and Europe, but other economic readings pointed to parts of the economy showing resilience in the face of high inflation and rising interest rates. China's outlook remains uncertain with more pandemic and civil unrest disrupting the economy. Economists expect, however, a rebound in growth next year if Beijing attempts to ease tough pandemic policies. Disruption of the European economy continues from the limitation of Russian energy supplies. Many households and businesses in the region are adapting by, for instance, cutting back on energy consumption. Adam Pozen, the president of the Peterson Institute for International Economics, said, quote, we're going to end up with more than 75% of the world's economy actually doing pretty well. The U.S. and European Union are likely to have relatively short, not

Starting point is 00:14:05 terrible recessions and return to growth possibly by as early as the fourth quarter of 2023. David Malpass, the head of the World Bank, raised concerns about the developing world facing increasing economic risk as policies adopted by advanced economies to address inflation and economic slowdown could leave insufficient capital for poorer nations. By way of a little preview, we're reading part of Alex Gladstein's new paper on the World Bank and the IMF tomorrow for Long Read Sunday. The S&P Global's composite indices of growth showed contraction in both the U.S. and Europe.

Starting point is 00:14:34 The U.S. data is showing one of the quickest contraction since 2009 in November, while Eurozone data shows the contraction beginning to ease but not yet back in expansion. Projections for U.S. GDP next year are falling but not disastrous. The Organization for Economic Cooperation and Development projects U.S. economic output will grow at an annual rate of 0.5% next year, down from an estimated 1.8% in 2022. Economists surveyed by the Wall Street Journal think U.S. gross domestic product will grow at an annual rate of 0.4% in 2023 and see a rising chance of a recession. in the next year. All in all, as you can tell, it's a weird time. We're getting mixed signals, mixed messages, markets don't know how to feel, and I think that we're going to be sloshing around this weird bottom for quite some time to come. One sector that is definitely feeling the impact of higher interest rates is real estate. Home prices slid in September for the third

Starting point is 00:15:24 straight month as the K-Shiller index ticked down by 1%. Craig Lazara, the managing director at S&P Dow Jones Indices, said in a statement, quote, as the Federal Reserve continues to move interest higher, mortgage financing continues to be more expensive and housing becomes less affordable. Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to weaken. So there you have it, guys. That is the macro outlook from here, like I said, slightly confused, hard to wrap your head around. Not good, but also maybe not a disaster. I think it speaks to this weird in between period we're in that I think is particularly acute for those of us in crypto living through all of this madness and contagion. But in any case, I hope that as

Starting point is 00:16:03 December starts, you've got things to look forward to this month that have nothing to do with either crypto or the global economy. I know I do, and I'm going to be spending a lot of time holding onto those things as we deal with whatever happens to come next. For now, I want to say thanks again to my sponsors, nexus.com.I.O., Circle and Cracken. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Market Whiplash as Jobs Report Undermines Powell’s Less Hawkish Speech

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.