Time’s Up

Too little, too late? Last week’s 818,000 downward revision in employment between March 2023 and March 2024 was the largest of its kind since the days of the Global Financial Crisis. The labor market will dominate the Fed’s dual mandate, and inflation will take a backseat. Employment-related data releases will now become an even more intense focal point for the markets than usual. Speaking of which, Nvidia’s quarterly report will be critical in the ongoing expectation of AI continuing to drive earnings, productivity, and revenue for the market in general. The stock market is still in pretty good shape, but employment will have to hold on for it to continue to be so.

Delayed Dissatisfaction

Jerome Powell’s Jackson Hole speech did not satisfy investors’ wish for a 50-basis point cut in September, but you could not tell that from the stock market’s reaction. Last week’s rally was sparked by reports that Powell would mention that the Federal Open Market Committee (FOMC) would be open to a 50-basis point cut when they meet September 17-18. The rally continued Friday despite that omission because the Fed chairman declared that the worst was over. Overheated supply chains and expanding labor demand were a thing of the past, and Powell said his confidence has grown that inflation would hit their 2% target--what’s not to like?

Powell also pointed out that “labor market conditions are now less tight than just before the pandemic in 2019.” That year, the Fed cut rates for the first time since 2007, cutting at three consecutive meetings in 25-basis point increments at their July, September, and October meetings. Unfortunately, we believe cooling inflation is being driven by weak spending as workers are growing more concerned about job security. Powell mentioned that the FOMC does “not seek or welcome further cooling in labor market conditions” and neither will investors. Celebrating the Fed finally pivoting to lowering rates will turn into a pity party if the FOMC ends up reducing rates out of fear to stimulate labor demand.

New York State of Mind

Is it really time to pass the champagne? We have been around long enough to know not to get in front of a market that wants to go up. Yet, we need to push back on any investor’s parade celebrating Fed rate cuts. The September payroll report may come in fine, pushing equity markets to all-time highs, but the New York Federal Reserve’s July survey of labor market expectations reveals what we have been discussing for a while: workers are increasingly concerned about their job situation. The percentage of workers currently searching for a job is at the highest level since the beginning of the survey in 2014. 

Promotion opportunities at workers’ current jobs hit their lowest level since 2014, a fast deterioration since July 2023’s record high. This shows that a year ago, management was trying to develop from within because they believed potential new hires were unqualified. The working environment has shifted dramatically, as seen by worker satisfaction with nonwage benefits hitting a 10-year low.

With the dismal results of the New York Fed survey in mind, Powell’s comments that the labor market “has cooled considerably” with unemployment “almost a full percentage point above its level in early 2023” is no reason to celebrate. The survey also contained the following nugget: among those surveyed, expectations of missing a minimum debt payment over the next three months hit their highest level since April 2020. The current level matches the pessimism that existed at the depths of the pandemic. Changes in trend, measured by this national survey across 1300 heads of households, need to be taken seriously.

China’s Local Governments Aren’t Buying It

China has tried several different avenues to prop up its property market, but the hits keep on coming. The latest data for July show new home sales falling 19.7% annually, and new home prices have moved lower for 11 consecutive months, recording their biggest drop since Q3 2014. There is a plan for local governments to redirect their special bonds, originally targeted for the environment and infrastructure, to buy homes. While there is an ample $500 billion in available funding left from this year’s issuance, there is tremendous uncertainty about the amount that would be deployed for housing. Local governments have been reluctant to dive in: less than $7 billion has been used from an existing pool of $80 billion marked for housing, including an attractive program to backstop home purchases with funding from the PBoC (China’s central bank).

The reason for this is local governments are looking at a paltry 1.4% rental yield even for China’s best cities, but their cost of funds is 1.75%. Therefore, unless they are forced by Beijing, the potential losses local governments could incur will limit the flow of public capital into housing. They should take a page from the U.S. in 2008 and direct huge sums to bolster housing, but a PBoC Governor said last week that they will not take any drastic steps. This situation has yet to bottom, and it is no surprise that commodities recently hit new lows for the year, and copper is down 20% in three months. Yet another factor the U.S. equity market is ignoring, for now.

What to Look for This Week

1. Tuesday, August 27 at 10:00 a.m. E.S.T. The Conference Board Consumer Confidence Index is released for August. Our focus will be on inflation expectations and employment. The labor differential (Jobs Plentiful minus Jobs Hard to Get) could give us a clue for August payrolls. We will also learn about consumers’ six-month labor market expectations.

NVDA releases its earnings after Wednesday’s market close.

2. Thursday, August 29 at 7:30 p.m. E.S.T. Tokyo Core CPI for August. Over the last 3 months, the inflation measure has risen from 1.6% to 2.2%, so another increase is bullish for the Japanese Yen and negative U.S. stocks. Retail Sales, Industrial Production, and the closely watched Jobs/applications ratio are released at the same time. An improved economic profile could increase interest rate hike expectations, pushing the Yen higher, which has been an overhang on U.S. stock markets.

3. Friday, August 30 at 8:30 a.m. E.S.T. Personal Consumption Expenditure inflation data for July. Should not be a surprise because the July PPI and CPI data have already been released. University of Michigan Consumer Expectations data is out at 10:00 a.m. E.S.T. and will be a good follow-up to Tuesday’s Conference Board Survey.