The Breakdown - Recession or Soft Landing?

Episode Date: September 10, 2024

With a Fed rates cut all but assured, the question has shifted to whether it will be a 25bps or 50bps cut. Alongside that speculation is a competition for narrative interpretation. Soft-landing on the one hand, recession on the other. 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, September 9th, and today we are going 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. Well, friends, the August jobs report was released on Friday by the Bureau of Labor Statistics showing continued deterioration in the labor market.

Headline non-farm payrolls grew by 142,000 below expectations, but significantly better than the 89,000 reported for July. The unemployment rate ticked down slightly to 4.2 percent, and so that pair of headline statistics were not bad. They indicated some weakness, but weren't the type of data that would trigger fears that a recession is already underway. Digging below the headlines, however, the statistics. were far more gloomy. U6, referred to as real unemployment, rose to 7.9%. Its highest reading since

October 2021. This statistic includes under-employed workers, workers who are marginally attached to the labor force, and those who have given up looking for work. The breakdown of full-time work and half-time work reinforced this idea. According to the household survey, employment rose by 168,000 jobs overall in August. However, this figure was largely about churn from full-time work into part-time work. 438,000 full-time positions were lost, while part-time positions increased by 527,000. The report included major downward revisions for the past two months. July's numbers were reduced by 25,000, while a third of payroll gains were wiped from the June data, a revision of 61,000 jobs. So what was the commentary? Well, the general sense was that this report was not weak enough to

spur outright panic, but did confirm that the labor market is heading in the distinctly wrong direction. Some had questioned the extremely weak jobs printed July due to a rise in temporary unemployment caused by Hurricane Beryl, but with another clear month of sluggish data, the negative trend is much more clear. Dan North, senior economist at Alianne said, I don't like this a whole lot. It's not disaster, but it's below expectations on the headline, and what really bothers me is the revisions. This is certainly going the wrong way.

Alternate data sourced from private firms suggest that the labor market is even weaker. Payrolls processing firm ADP said that just 99,000 jobs were created in the private sector. That's a 10% slowdown from July and almost 30% below the consensus estimate. ADP's numbers show the worst month for labor market growth since January 2021. Outsourcing firm Challenger reported this was the worst August for layoff announcements is 2009, with 76,000 for the month. The metric tripled since July, firm's most commonly cited cost-cutting and economic conditions as the cause of layoffs, with AI adoption a minor sub-theme. Hiring announcements have also slowed to a crawl after being depressed all year. Challenger has aggregated only 80,000 hiring announcements year-to-date,

the lowest total since they began collecting the data in 2005. As these figures look at announcements rather than employment activity, they are inherently forward-looking. They suggest that the labor market is not only weak, but will continue to slow down into the end of the year. Challenger's SVP and your Challenger said, August surge in job cuts reflects growing economic uncertainty in shifting market dynamics. Companies are facing a variety of pressures from rising operational costs to concerns about a potential economic slowdown, leading them to make tough decisions about workforce management. The big takeaway, then, is that the labor market conditions are obviously bad, although not catastrophic enough to force the Fed's hand. Seema Shaw, chief global strategist at principal asset management

said, for the Fed, the decision comes down to deciding which is the bigger risk, re-igniting inflation pressures if they cut by 50 basis points, or threatening recession if they only cut by 25 basis points. On balance with inflation pressure subdued, there is no reason for the Fed not to err on the side of caution and front-load rate cuts. Sanu Vargis, a global market strategist at Carson Group commented, the labor market is clearly softening and the Fed needs to step into cut-off tail risks. The report seals the deal for a September rate cut, but the big question really is whether the Fed goes big.

Laura Rosner-Warburton, a partner at Macro Policy Perspectives, wrote, There are two roads they could take, steady 25 basis point cuts with a commitment to do more if the labor market shows signs of additional cooling, which it did today, or you go in with larger increments and try and downplay the negative signal. There are two paths we feel on the fence with this report. It leans towards 50. In terms of other indicators of where we are as an economy, also last week, the Fed released their Bejjbuk survey of regional economies. The beige book collates anecdotal data

from companies and industries across each of the 12 Fed districts. The report is released eight times a year with this edition covering data collected up to late August. Most regions reported flatter declining economies and obvious signs of distress. While few companies reported outright layoffs, some were reducing hours, slowing hiring, and reducing headcount via attrition. Use of the word decline in survey answers has skyrocketed from the previous release in July and is now at its highest level in over a year. Julia Plack, the chief economist at ZipRecruiter wrote, Oof, today's Bejew, today's Beech book is the most downbeat I've read in ages,

especially the sections about hiring. They point towards a slowing, slackening labor market, not one that is stabilizing at pre-pandemic levels. Bloomberg economist Anna Wong thinks that Powell Fed is extremely tuned into this anecdotal data, tweeting, Recall the October Bejibuk is what did it for Powell for him to pivot last December. This beige book is even worse than that one. I think Powell is going to strongly push for a 50-bases point cut now. Furthermore, Powell told us

before he liked the Bejibu and that it led other data. Macro-trader Craig Shapiro pointed out that it's highly unusual for the Bejbuk to be this clear about a slow-down tweeting. Fed's Bejibuq has a downbeat overall assessment to it, economic activity flat or declined in most districts. If you look back over the last four years of Begebook data, it is pretty rare for the Fed to acknowledge that growth is declining like this, only the fourth time since 2019. It's worth noting as well that that included a pair of reports released in mid-2020, that describe the collapse in economic activity in the wake of the pandemic. Shapiro continued, this is part of the reason that Powell pivoted so hard at the Jackson Hole speech and clearly

set up the cutting cycle. The Fed is becoming more concerned about the pace of economic momentum. Markets rallied last year from the pivot in December, which ended the hiking cycle, but we also had a recovery and growth and inflation due to the loosening of financial conditions. Not sure if this is the setup this time, as the growth slowdown seems to be gathering more momentum. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me, at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry

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the conference, and again, you can use code breakdown 10 to get 10% off. So with all of this going on, a series of Fed speakers were unleashed to explain the current thinking. Fed Governor Christopher Waller was first up, and all but confirmed the cutting cycle would begin next week. He said, the current batch of data no longer requires patience. It requires action. Considering the achieved and continuing progress on inflation and moderation in the labor market, I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting. Waller used the same phrasing as Chair Powell during his Jackson Hole address late last month, titling his speech, the time has come.

While Waller is on board to cut rates, though, he was indecisive about the size of the first cut, commenting, determining the appropriate pace at which to reduce policy restrictiveness will be challenging. Choosing a slower pace of rate cuts gives time to gradually assess whether the neutral rate has in fact risen, but at the risk of moving too slowly in putting the labor market at risk. Cutting the policy rate at a faster pace means a greater likelihood of achieving a soft landing, but at the risk of overshooting on rate cuts if the neutral rate has in fact risen above its pre-pandemic level. As a quick aside here, I will say that there is no category of public commentary that more sounds like you asked Chatchipit to give mealy-mouthed thesaurus-based answers

than Fed governors talking about any upcoming policy changes. Anyway, Waller indicated that he views the September meeting as the start of a cutting cycle rather than a one-off adjustment. He said the pace of rate cuts is a decision for the future, and that he believes the FOMC can adjust policy, quote, quickly and forcefully in reaction to labor market weakness. He concluded, I am open-minded about the size and pace of cuts. If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings. If the data suggests the need for larger cuts, then I will support that as well. The closest he came to a tell was noting that, quote, I was a big advocate of front-loading rate hikes when inflation accelerated in 2022,

and I will be an advocate of front-loading rate cuts if that is appropriate. New York Fed President John Williams had similar comments later in the day. He said, with the economy now in Equipose and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate. In other words, the economy has reached equilibrium, inflation is no longer the primary concern, time to cut rates. Williams noted that the risks of inflation and unemployment are in better balance, but rates need to come down to reflect that balance. He did not speak to the decision between a single cut or a double cut next week,

stating only, monetary policy can be moved to a more neutral setting over time depending on the evaluation of the data, the outlook, and the risks to achieving our objectives. Chicago Fed President Austin Gouldsby rounded out comments from Fed speakers on Friday with an interview focused on the labor market. He said, If we remain tight for too long, we are going to have to deal with the employment side of the mandate. With inflation coming down each month, real rates and therefore policy tightness have pushed higher. Gouldsby added, do you want to tighten when the job market is cooling that much? It raises serious questions not just about this meeting, but over the next several

months. How do we make sure or make an effort to not have things turned into something worse? That's the critical challenge facing the Fed, in my view. When asked directly whether the Fed was behind the curve, Gulesby gave a convoluted answer but acknowledged that rates are inappropriately high. He added, If you're going to have a soft landing, you can't be behind the curve. It's very clear what's happening in the economy. Inflation is way down, we're not overheating, and there are definitely warning signs of things overcooling. Pressed about next week's decision, Goulsby declined to push for a 50-bases point cut, saying, I don't think what happens

at the next meeting alone is what is the most important. Now, while Fed officials were reluctant to take their reputation on an aggressive first cut, opinion columnists were more than willing to explore that. Former Treasury Secretary Larry Summers said, The numbers certainly didn't show hugely pronounced weakness, but if you were concerned by the recent trend in the statistics, they certainly didn't give you a clean bill of health for the economy. It's looking like a closer call for 25 versus 50 in September than was my guess a month ago. At this stage, Summers isn't assuming a recession is on the horizon, and if substantial weakness doesn't show up, he believes the cutting cycle might not even bring rates down to 3.5%.

Writing in Bloomberg opinion over the weekend, Jonathan Levin, believes that deep rate cuts are needed for recent graduates and currently unemployed workers. He wrote, This is not an economy that's heading for an imminent recession, bar from it. It is, however, a uniquely challenging labor market for recent grads and other new entrants trying to find their first job. That's reason enough for the Federal Reserve to start lowering interest rates, perhaps even aggressively. For context, around 718,000 new entrants to the labor force are currently unemployed, the most since 2017. We've seen this phenomenon before, with the 2009 financial crisis leaving a lasting scar on the careers of graduates at that time. The Powell Fed has also

dabbled with the concept of looking at the components of the labor force rather than aggregate numbers. In 2020, for example, the Fed explicitly redefined its goal of maximum employment to be, quote, broad-based and inclusive. This policy was used as a reason to hold rates lower for longer to ensure the labor market recovery reached black and Hispanic workers. We're starting to see the inverse effect show up, with unemployment in the black community rising faster than other racial groups. Levin's point was that the unemployment spike is already here. It's just not evenly distributed. He wrote, rather than slower. That means a 50-bases-point rate reduction at the policy meeting later this month.

There's no point in waiting for layoffs to accelerate to kick rate cuts into high gear when so many willing and ready workers are already struggling. When it comes to the markets, their sense of what happens next is increasingly clear. Fed funds futures are now pricing in a 75% chance of a single rate cut. The remaining 25% odds are allocated to a 50-bases point cut. Odds of a larger-than-normal cut had spiked to 50% on Friday morning following the release of the jobs report, but were reined in as Fed officials started speaking. Moving forward to the end of the year, market see four rate cuts over the next three meetings as a near certainty. There is also a 50% chance of additional cuts priced in, with five cuts being just as likely as four, and six cuts as a 10%

tail risk. Matt Hogan, the CIO of Bitwise tweeted, interesting, the probability of 50 basis point rate cut in September is down, but the probability of more than 125 basis points in cuts by December is up. Basically, it's not at all clear when the Fed will accelerate the cutting cycle, but that happening sometime this year is viewed as a safe bet. Looking even further out, markets are pricing Fed rates at around 3% by mid-next year. This would be the most rapid cutting cycle in recent memory, but not quite as fast as 2007, which featured multiple unscheduled emergency meetings. Jamie Patton, the co-head of global rates at TCW Group, is convinced that even this aggressive rate path isn't enough, commenting, the Fed is going to have to lower rates faster and more aggressively

than what the markets priced in. For several weeks, the simplest framework for thinking about the September meeting has been that a single rate cut is priced in and neutral for risk assets, while a 50-basis point cut would be an admission that the Fed is behind the curve according a recession, triggering panic among investors. As we approach the first rate cut, however, it seems that panic is happening regardless of the Fed's decision. The S&P 500 had its worst week since March 23 last week, capped off by a 1.7% drop on Friday. The NASDAQ shed 2.5% on Friday, and is now 10% off the highs. Bitcoin showed the same distress with a large sell-off on Friday morning. Prices fell below 53,000 before the bids came in. The weekend recovery was

tepid barely reaching 55,000 and showing very little volume. So basically now, it's all eyes on the Fed, but it's kind of hard to imagine a scenario where anyone is particularly happy with what happens next. And that will kick off our Monday. Lots of exciting stuff coming up to talk about this week. But for now, appreciate you listening as always. And until next time, be safe and take care of each other. Peace.