Tough to say anything other than this morning’s labor report is indicative of a continued strong labor market and a still ok economy. +260K adds to nonfarm payrolls, led by the private sector. Average hourly earnings +.4% for the month, with both hours worked and hourly wages higher. The favorable market reaction is to the unemployment rate ticking up to 3.7% from 3.5% and the household employment data telling a different story than the gains in the payroll data. Household employment has been stale now for the past 4 months – have to do some more digging here but it looks to be more people working two jobs, not more people working…more to follow. We still have TONS of economic data to come in the next month, but this labor report signals enough ammunition for the Fed to hike 50bps in December. For the Fed to really start thinking and talking about “pausing”, I think it’s going to need the unemployment rate to get to 4%. More labor destruction required, but I think we’re on a path there already.
The big picture is that mortgage rates are now +7%, the front end of the yield curve is inverted, and economic demand is falling and falling fast. Lumber prices have collapsed, freight rates have collapsed, and layoff announcements are up a lot. The combination of higher rates, a strong USD, the Fed hiking rates hard and fast, and quantitative tightening now running at $95 billion a month (Fed balance sheet shrinking) is all taking its toll. We printed $3-4 trillion too much stimulus to fight the pandemic and that needs to be consumed by inflation. Much of it already has been. The economy is losing altitude quickly, and while tough talk and perhaps some tough love by Fed chair Powell might work behind the microphone at a press conference, if the Fed isn’t very, very careful here they risk turning a recession into a crisis.
In this market, “bad news” now equals “good news”. We need some “bad news” in order to get the Fed to hit the brakes on hitting the brakes.
Chief Investment Officer
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