The Breakdown - The No-Landing Economy? Market Rebounds on Jobs Beat

Episode Date: April 6, 2024

On Thursday the market was rocked, with the three major indices all down more than 1%. On Friday they recovered with a better than expected jobs report. Still some are wondering if it's ever going to make sense to cut rates. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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 Friday, April 5th, 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, really a tale of two markets last couple days. We start, of course, on Thursday afternoon where we saw a dramatic plunge in U.S. stocks, adding more volatility to an already shaky week.

The NASDAQ index fell by 2.5% while the S&P 500 dropped by 1% and the Dow Jones Industrial average saw a 1.7% decline. All 11 sectors of the S&P 500 saw drawdown, suggesting that this was a broad-based macro route. It was the first time in the last month that all three major stock indices closed down by at least 1% on the day. The explanation for the drawdown were numerous and varied, including inflation risk, geopolitical risk, and Fed policy. All of these explanations layered on top of each other to create conditions where risk was being shifted to the downside. In some ways, that may have been to be expected. This year started off with a hot run for stocks, extending the strong rally that began in November. Both the S&P 500 and NASDAQ indices are up

around 8.5% for the year, and the returns are even more clear if you zoom in on the hottest tech stocks, the Magnificent 7. CNBC's Mag. MAG7 index has risen by 16.7% so far this year, led by a 78% gain for Nvidia. This all means that asset managers, particularly those who came into the year overweight tech, have an opportunity to sell everything, lock in a healthy annual gain, and get a jumpstart on their summer vacation. And after this week's price action, there have got to be more than a few risk managers thinking about the age-old Wall Street advice to sell in May and go away. Interestingly, and as an aside, there's actually some reasonably strong data underlying that advice. According to a long-term study from William O'Neill and company,

over the past 50 years, the S&P 500 has seen an average gain of 6.5% for the period between November and April. Gains for the May to October period were just 1.6%. Calendar effects are always a little questionable, and they obviously can't explain a single-day sell-off. But it's not irrelevant in this context. At this stage, with a strong six-month rally in the books, it's not impossible that traders are looking for an excuse to take profits and de-risk, rather than for a reason to get bullish for another leg up. Looking at possible causes of Thursday sell-off, the most proximate seem to be comments from Minneapolis Fed Fed Fed rate cuts in when they would arrive.

Keshkari said, If we continue to see inflation move sideways, then that would make me question whether we needed to do those rate cuts at all. He noted that in March, he had penciled in two rate cuts this year and admitted that he was on the more hawkish side of the committee. Keshkari pointed out that the U.S. currently has strong consumer spending, GDP growth, and job growth, adding, why would we cut rates? Maybe the dynamics that we have right now are actually sustainable. When asked that the Fed would consider hiking rates, Keshkari said that the hikes are not off the table, but that they were unlikely. Instead, he suggested,

The first thing I think we would do is just hold rates here for an extended period of time, to see if that would ultimately do the trick. End quote. However, if further progress on inflation isn't made in a reasonable period of time, Keshkari did think that rate hikes would be considered. He emphasized that inflation data needs to be guiding rate decisions moving forward. Importantly, Keshkari is not a voting member of the FOMC this year, so his views are a little less important than they might otherwise be. Still, Keshkari's comments flashed across terminal screens just as the sell-off began, making for a very clean narrative explanation if nothing else. In some ways, Kashkari wasn't introducing new ideas to the Fed discourse, but simply validating

an opinion which has been floated by macro analysts for several weeks. Namely, that there's no obvious and pressing need for the Fed to cut rates, so why take the risk of reigniting inflation? Kashkari's comments were the first time a Fed speaker has suggested that rate cuts might not happen this year, but others are in wait and C mode. Fed Chair Jerome Powell reiterated this stance in a speech on Wednesday, stating, on inflation, it is too soon to say whether the recent readings represent more than just a bump. We do not expect that it will be appropriate to lower our policy rate until we have greater

confidence that inflation is moving sustainably down towards 2%. Powell's comments continued the narrative he presented at the March FMC meeting. He gave the sense that the Fed is in no rush to cut rates and can wait to see how the data plays out. Powell portrayed the majority view of FOMC members as being that rate cuts will become appropriate at some point this year. However, when it comes to the timing of the first cut, he said, we can approach that question carefully and let the data speak on Cleveland Fed President Loretta Mester also spoke on Thursday, stating that she feels the data is getting to justifying rate cuts. She said, I want to see a couple more months' data. I did anticipate that we'll see inflation moving down, and now we need to see more evidence that confirms that.

And once I see that, then I think we're in a position to move interest rates down. Her view was that as inflation has cooled off, the Fed has the policy space to react quickly if the labor market deteriorates. However, without any big problems showing up in the economy, there's no reason not to wait a few more meetings before making a decision. Now, overall, Thursday featured half a dozen Fed speakers, so we'll touch on a few of the rest of the important quotes just to get a quick overview. Chicago President Austan Goulsby, the most dovish member of the committee, thinks that inflation can come down to 2% without a big recession. He said, If you look at the broader economy, it doesn't look like broad-based overheating, so I still think

inflation's coming down and we're going to get to 2%. Richmond President Thomas Barkin said it was smart for the Fed to take their time on rate cuts. He said, no one wants inflation to reemerge. Given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down. Indeed, with the most recent inflation data showing a tick-up, what's clear is that the Fed is in no rush. Michael Sheldon, an executive director at RDM Financial Group, put it like this. The big debate for the remainder of this year will really be how many rate cuts we get and how quickly does inflation come down if it continues to. What makes Kachari's comments impactful is that they shifted the outside boundary on rate policy for this year. Until yesterday,

there had been consensus that rate cuts would be arriving this year. Analyst differed on whether there would be two or three rate cuts and when they would begin, but pushing cuts back into next year was pretty much unthinkable. This macro view allowed traders to hold on to their bullish stance relatively risk-free. In other words, whether rate cuts arrived in June or July really didn't make much of a difference. Keshkari's comments on the other hand opened the tail risk, that rates remained unchanged all the way through into next year. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course,

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without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. So what are bond markets saying about all this? Well, they've spent most of the week trading up in yields with the two-year treasury yields surging to a year-to-date high above 4.7% on Monday. Bond yields dropped on Thursday afternoon alongside the fallen stocks with the two-year

losing five basis points. The high-level point is that there was no evidence in the bond market showing a repricing in line with Keshkari's views. markets moved in the opposite direction buying bonds to push rates down. It's only a short-term move, but it looked more like a risk-off flight to safety than pricing in Fed rates being held higher for longer. Checking in on market pricing of FOMC decisions, the odds of a rate cut in June actually went up slightly on Thursday. It's currently sitting a little above 60%. The market is now showing 80% odds that one or more cuts have been delivered by the July meeting, with three rate cuts

the median expectation for the year. Important to keep in mind that these figures which are co-related by the CME's Fedwatch tool are notoriously poor as a predictive tool. They more closely reflect the amount of rate hedging going on in the market than outright bets on the level of interest rates. Still, the market position contains some valuable information. If traders believed what Keshkari was saying, there would be a whole lot more hedging activity around the risk that rates remained unchanged through to the end of the year. As it stands, markets are factoring in only a 1% chance that this is the outcome. It's also noteworthy how these positions have evolved throughout the year and the impact that has on risk sentiment. In January, when the FOMC first presented their guide of three rate

cuts this year, the market began pricing in as many as seven cuts. The positioning has been consistently walked back since then, with markets now showing a little under three rate cuts for the year as the expectation. That's a massive change in risk sentiment and goes a long way to explaining why the bull market inequities might be losing steam. Of course, the most useful way of gauging whether the Fed will cut rate soon is by looking at the macro data. Most of the attention has been around inflation data and the last two months coming in hotter than expected, suggesting that progress on inflation has stalled out above 3%. March CPI data isn't due out until next Wednesday, so it's a little pointless to speculate on inflation. Instead, this week has some interesting labor market

prints. On Thursday, weekly initial unemployment claims rose to their highest level since January. The data came in a little higher than expected, with forecasts expecting only a slight rise in initial claims. Job cut announcements are at the highest level in a year, according to Challenger data, suggesting that more layoffs are expected in the coming weeks. Andy Challenger, the senior VP at the firm, said, layoffs certainly ticked up to round out the first quarter, though still below last year's levels. Many companies appear to be reverting to a do more with less approach. Earlier this week, we received PMI data for services in manufacturing. The manufacturing data is beginning to show expansion in the sector for the first month after more than a year of contraction.

Services, however, is rolling over and heading towards contraction after a year of strong growth. Lizanne Saunders, the chief investment strategist at Charles Schwab wrote, fits with our rolling recessions and recovery thesis. Manufacturing hit first, now improving, with services now getting bumpy. The big issue with services rolling over is that it's a much larger sector than manufacturing. A contraction in services could easily present a drag on the economy without a strong rebound over the summer. The final and most important piece of macro data for the week was the jobs report, which was released this morning. Chris Larkin and Morgan Stanley explained the stakes, writing, as always, the monthly jobs report will have the final say. Investors will be looking

for a Goldilocks number that won't give the Fed any reason to delay rate cuts, but also doesn't suggest the labor market is taking a serious downturn. So what did we get? Well, the Bloomberg headline says it all. U.S. jobs roar again as payrolls jump 303,000 and unemployment drops. March payrolls, they write, exceeded all projections. the biggest since May. Unemployment rate fell to 3.8% and the participation rate increased. The estimate had been 214,000 jobs, so this 303,000 number was significantly higher than expected. The numbers seem to be bullish enough that even though this seems to add more evidence or more credence to the Fed waiting and delaying rate cuts even more, the bullishness that it represents for the economy

is still winning out. As Bloomberg writes, the stock market is ending the week on a positive note after a blowout jobs report signaled the U.S. economy will continue to power corporate America, even if that means the potential for still elevated interest rates. Said George Mateo at Key Wealth, bang, employment up, rate cuts need to come out. The Fed will likely need to reconsider its current stance of three rate cuts this year. But the reason for this likely change in posture is bullish. The economy is doing well.

Steve Wyatt at Bach Financial writes, It's hard to find anything wrong with the March Jobs report. The only people who might be disappointed in today's report are those looking for relief from Fed rate cuts. We still expect the next move from the Fed to be lower rates, but there is little sense of urgency at the moment. Dallas Federal Reserve President Lori Logan was out today saying that she thought it was too soon to consider cutting interest rates. In prepared remarks at Duke, she said, in light of these risks, I believe it's much too soon to think about cutting interest rates. I will need to see more of the uncertainty resolved about which economic path we're on.

So that's the rate story, but one more thing before we get out of here today. Heightened geopolitical risks seems to be an under-recognized reason for yesterday's sell-off. Thursday afternoon featured significant headlines about major conflicts around the globe. Regarding Ukraine, U.S. Secretary of State Anthony Blinken attended NATO headquarters for a meeting. He included in his comments the unambiguous statement, Ukraine will become a member of NATO. NATO membership would obviously cause escalation in Eastern Europe, but that pales in comparison to issues in the Middle East. Right around the time of the sell-off, President Biden held a telephone call with Israel Prime Minister Netanyahu. Global support for Israeli forces

has reached a new low point after news of an attack earlier this week, which killed seven aid workers. Biden called the incident unacceptable. A White House statement said that Israel must, quote, announce and implement a series of specific, concrete, and measurable steps to address civilian harm, humanitarian suffering, and the safety of aid workers. The White House emphasized that U.S. policy will be determined by Israel's, quote, immediate action on these steps. Officials framed the discussion as Biden calling for an immediate ceasefire. The other moving piece in the Middle East is retaliation after Israeli forces destroyed an Iranian embassy in Syria, killing two generals. Nothing appears to have happened yet, but concerns are reaching

fever pitch, fake videos claiming to be an attack on Tel Aviv circulated yesterday, and Netanyahu is clearly not backing down from the escalating conflict. Indeed, he used the call with Biden to warn the U.S. that Israel will defend itself from any counterattack. After the call, Netanyahu said, We will know how to defend ourselves and we will act according to the simple principle of whoever harms us or plans to harm us, we will harm them. To give a sense of how breathless some of the takes are on FinTwit, endless capital tweeted, this is the real deal, people, Iran is going to war with Israel after what was done. The Middle East is about to blow the F up and oil prices are going explode higher, causing rates in inflation to have a second surge. The end of this mini bull market has

arrived. These flaring tensions have already shown up in oil prices, with Brent crude rising above $90 per barrel for the first time since October, almost a 2% spike on the day. Crude oil has only spent a few months trading above the current level in recent memory during the first half of 2022. Rising oil prices contributed to the massive spike in inflation during that period. Rapid Ann Energy founder Bob McNally claimed that major escalation would bring a $40 increase in the price of oil, adding, that would cause a recession. He gave that outcome. a 30% chance of occurring and suggested that the market has only just begun to price it in. Matt Maly at Miller-Tabak said,

If we get a direct conflict between Israel and Iran, that's something that will likely restrict the supply of oil coming from the Middle East. That has not been an issue up until now, but it could become one very quickly. OPEC Plus also met earlier this year deciding not to wind back production cuts put in place over the past year. The next meeting is set for June and there are no signs that the oil cartel has any intention of adding more supply for the rest of the year. So friends, interesting times, if not a little bit disconcerting as well. Hopefully you feel like you have a better sense of what's going on, to the extent that anybody does,

but for now, that is going to do it for the breakdown. One more big thank you to my sponsor for today's show. Check out the Ledger Orange Bitcoin Nano. 5% of sales go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.