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High Anxiety is Auto-Correlated

High Anxiety is Auto-Correlated

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4 years ago

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The economic and financial reaction to the global pandemic has triggered a surge in the US dollar, which itself may amplify the disruption that is evident throughout the capital markets.  The macro analysis piece (The Economic Tsunami that has Begun and the Drive for Cash) focuses on the fundamental considerations behind the greenback's surge. This piece focuses specifically on the price action itself.  

One way to conceive of the price action is that it is a reflection of psychology. Not the Freudian psychology of the id, ego, and superego, of course, but crowd psychology.  As an individual, we may learn, but crowd behavior seems repetitive, and hence patterns emerge. Also, technical studies can help quantify the risk and provide mile-marker-like levels. 

In equity investing,  one can pay a downpayment of the purchase, as in buying on margin. In the over-the-counter markets, one does downpayment is not toward the purchase, but toward the future loss. How much can one lose before the position can be closed? This is a function of volatility. As volatility rises, participants are forced to trade smaller size or pony up more funds. Volatility often appears auto-correlated, which means the best guess for the next period volatility is the last period. High vol periods seem to come in clusters. That suggests that elevated volatility should be expected in the days ahead. In turn, that has implications for the placement of orders, slippage on execution, and the tolerance of violations of technical targets.  

Dollar Index: On March 9, the Dollar Index was sold to 94.65 its lowest level since September 2018. It has preceded to rally to 103.00, its best level since January 2017. The surge lifted the momentum indicators into over-extended territory, and they are not showing an imminent turn lower. The Dollar Index has closed above its upper Bollinger Band (~100.87) for the past two sessions. The next upside chart points come from the late 2016/early 2017 high in the 103.55-103.80 area. Above there is little until Aug-Sept highs in 2002 (~108.75-109.25). Initial support may be in the 101.00-101.50 area. A break of that area, without going much higher first, could be an early sign that the surge is over.  

Euro: The single currency fell by about 3.75% last week following a nearly 1.6% decline the previous week. It traded in a six-cent range last week (~$1.0635-$1.1235). The last time a month had such a range that big was in January 2018. One-week implied volatility rose above 20% last week for the first time in four years. One-month implied volatility finished last week, around 14.3%. It had been near 6% at the end of February. The technical indicators do not point to a near-term euro bottom yet, and the next support area is around $1.05. However, the volatility means a move below $1.00 cannot be mathematically discounted. A move above $1.08 now is needed to stabilize the tone. 

Japanese Yen: The dollar reached JPY111.50 ahead of the weekend as it nearly completes the round trip that began around JPY112.20 on February 20-21. It dropped like a rock to JPY101.20 on March 9. The technical indicators are not yet over-extended, and the upper Bollinger Band is near JPY112.25. The most acute shortage of dollars may not be from Japanese commercial banks, but other financial institutions and may not be addressed by the official dollar-swap lines. A move above the JPY112.50 area could target the JPY115 area. March 12 was the last session that the dollar took out the previous session's low. The pre-weekend low was about JPY109.35. Below there, support is seen in the JPY108.00-JPY108.35 area. 

British Pound: Sterling has been pounded for 11.3% since the nearly $1.3210 peak on March 9. It recorded a low a little above $1.14 ahead of the weekend, a level not seen since 1985. The low then was around $1.05. For the past three sessions, it has slipped below $1.15 intraday but has failed to close below it. The pre-weekend bounce fizzled near $1.1935, shy of the $1.20 psychological level and $1.21, the (38.2%) retracement of the sharp sell-off. The MACD and Slow Stochastic appear to be trying to bottom. One-week and one-month volatility reached nearly four-year highs of around 35.5% and 26.2%, respectively, last week. There have been ten-cent ranges in each of the past two weeks, and the softening of the implied volatility ahead of the weekend may be hinting that such ranges are unsustainable. 

Canadian Dollar: Since March 9, when the US dollar bottomed against most of the major currencies, the Canadian dollar has been the strongest, losing only 4.6% of its value. Its 1% rally before the weekend solidified its standing. Although the Bank of Canada has cut rates 100 bp this month, at 75 bp, the policy rate is still 50 bp above the next highest G7 countries, including the US. Between the drop in oil prices and commodity prices more broadly, and the economic and financial disruption is going to be significant. The US dollar reached almost CAD1.4670 on March 19 before dropping to nearly CAD1.4150 on March 20, helped by a surge in oil prices and a (brief) moment of stability in equities. The MACD looks to be about to level-off at extreme levels. The Slow Stochastic has been flatlining near its highs. After closing for three sessions about its upper Bollinger Band, the US dollar moved back under it (~CAD1.4525) at the end of the week. The US dollar approached the high from last 2016 near CAD1.4670.  If this is overtaken, there is appears to be nothing on the charts to prevent a test on CAD1.50. 

Australian Dollar: The Australian dollar recorded back-to-back weekly declines of more than 6.5% (nearly 8.5 cents). It took out the lows from the Great Financial Crisis near $0.6000 and fell to almost $0.5500, last seen in October 2002.The pre-weekend session was the first since March 9 that the Aussie rose above the previous session's high to reach about $0.5965. It needs to recapture the $0.6000-$0.6030 area to give up that collapse is over. The announcement that the Federal Reserve was granting Australia (along with several other central banks) dollar-swap lines seems to help the spot. Still, the three-month cross-currency basis swap finished the week at what appears to be a record extreme. The Slow Stochastic appears slightly ahead of the MACD in suggesting a potential easing of the selling pressure. Volatility soared to levels not seen since last 2008, as one-week vol jumped above 46%  and one-month role rose almost 38% (both were tenors were are 10% at the end of February).

Mexican Peso: Initially, the dollar strengthened against the peso as carry-trades that were drawn to Mexico's high real and nominal rates were unwound. The greenback gains accelerated as the peso was sold alongside other emerging markets currencies. Mexico depends on tourism, and worker remittances as sources of hard currency, and these streams are evaporating. The government also seems slow to respond to the Covid-19 threat by closing down airports and restaurants, for example. Banxico delivered a 50 bp rate cut ahead of the weekend, but at 6.5% it is overnight rate remains among the highest in the G20.  Mexico was struggling before the pandemic and seems ill-positioned to cope with the coming economic shock. The dollar is at record highs against the peso, reaching almost MXN24.65 before the weekend. The rise has been breath-taking: 11.4% last week after 9% the previous week. In the five-week advance, the greenback has risen from about MXN18.54 on February 24 to settle a little below MXN24.42 before the weekend, an almost 32% move (31.7%).  

Chinese Yuan: The dollar had been relatively stable against the Chinese yuan from the time the local markets re-opened from their extended Lunar New Year holiday on February 3. It was confined to a CNY6.91-CNY7.05 trading range. The broad dollar buying pressure was too great, and it gapped higher on March 19 to trade near CNY7.1250 and held the breakout on March 20. The dollar reached a high around CNY7.1850 last September, though the CNY7.15 area may prove a bit sticky first. The yuan lost about 1.2% against the dollar last week but gained against near every other currency in the world. This appreciation may have prompted officials to allow a weaker yuan in the previous couple of sessions. However, the fix has been stronger yuan than the bank models suggested in recent days.   

Gold: The price of gold has dropped 15% since March 9, high above $1700. Some gold sales were linked to the need to raise cash (in part to meet margin calls elsewhere). Other links include some participants borrowed dollars to buy gold, and as the structure was unwound, gold, which was treated like any other asset, was liquidated. There was an attempt to form a base near $1450 last week.  Both the MACD and Slow Stochastic have flattened out but have yet to turn higher. A close back above the 200-day moving average (~$1503) would help the tone. If a near-term bottom is in place, then the first corrective targets are seen near $1544 and $1575.

Oil:  May crude reached nearly $20 a barrel in the middle of last week, an 18-year low. At the end of 1998 is briefly traded below $10.50.  Although the MACD and Slow Stochastic are overextended and the $20 level was tested again ahead of the weekend, there is no compelling technical sign a low is in place.  The lower Bollinger Band is a little below $18.  Initial resistance is seen near $30 and then $36.35. Ahead of the weekend, Saudi Arabia and Iraq reduced discounts for shipments (which is tantamount to a price increase), and Aramco CEO warned that it may not be able to maintain maximum output beyond April.  Over the past two weeks, US crude inventories have risen about 9.5 mln barrels. Meanwhile, as the first step toward implementing Trump's call for the to top up the Strategic Petroleum Reserves (available capacity of another 77 mln barrels), the Department of Energy said it would buy 30 mln barrels by the end of June (~11.3 mln barrels of sweet crude and ~18.7 mln barrels of sour crude).  It will focus, according to official statements, on purchases from small and medium-sized producers (with less than 5k employees).

US Yields: The largest and most liquid and transparent bond market, US Treasuries, has been destabilized. Consider the ranges of the generic 10-year yield. In the first week of March, the range was a little more than 50 bp. In the second week of March, the range was 70 bp, and last week's range was 65 bp. The March 9 low was about 31 bp, and last week's high (March 19) was 1.27%. The yield pulled back to 84 bp ahead of the weekend. At 137-06, the June note futures retraced half of its losses since the March 9 high (140-24). The next (61.8%) retracement is near 138. The two-yield fell for the fifth consecutive week. On Valentine's Day, it closed just shy of 1.43% and finished last week a touch above 31 bp. The first fed funds futures contract that ended last week above 25 bp was July 2022, though illiquidity may distort. The June Eurodollar futures contract implies a three-month yield in three months of a little less than 55 bp. The next quarterly contract that implies a higher yield than that is December 2022.  

S&P 500: The benchmark has not strung together two consecutive gains in over a month. It finished last week below the initial (38.2%) retracement of the rally since the 2009 low that is found near 2352. The next retracement (50%) is seen near 2030. The Slow Stochastic is moving sideways in over-extended territory, while the MACD appears to be at record lows and still heading south. The VIX peaked in the middle of the week above 85, more than four-times the six-month average. It traded below 60 ahead of the weekend before rebounding to close above 66. The higher vol is translated into wider Bollinger Bands, which are set at two standard deviations from the 20-day moving average.  The S&P 500 finished the week above the lower Bollinger Band (~2230).  




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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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2 hours ago

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March 9, 2024

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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17 hours ago

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March 8, 2024

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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17 hours ago

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March 8, 2024

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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