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Weekly Market Pulse: Maybe It Was Transitory After All

The inflation report last week was met with a big sigh of relief by investors. Stocks and bonds rallied as the Fed’s Whip Inflation Now project seems to…



The inflation report last week was met with a big sigh of relief by investors. Stocks and bonds rallied as the Fed’s Whip Inflation Now project seems to be finally bearing some fruit. In reality, inflation peaked months ago but the Fed hadn’t really caught on yet – they’re a little slow – and the market has been fearing that they would go too far and cause a recession. But surely, the market seemed to say, the moderation is so obvious now that even Jerome Powell can see that he’s done enough.

That being the case, the natural thing to do was buy stocks and investors did just that last week. The S&P 500 was up 2.7% on the week, continuing a rally that started in mid-October and has seen it rally 14.5% from its intraday low on October 13th. It isn’t just the S&P 500 up either. Small cap stocks are up 15.6%, mid cap 18.8% and REITs 20% since October 13th. European stocks have done even better beating the US by a wide margin, up 41.7%. The more diversified international value index we hold (EFV) is up 30.3% from its low. International value was down less at the low (-22.3% vs -25.9%) and is now down just 4.3% year over year vs 12.9% for the S&P 500.

Forgive me for being the party pooper but I think this might be just a tad overdone. The inflation report was pretty good last week, continuing the moderation that started in July of last year. I’d hardly give credit to the Fed though. About the only thing I can directly credit to their interest rate hikes is the whopping 2.4% drop in national housing prices. Did the Fed have anything to do with the drop in used car prices which are down every month since last June and 8.8% year over year? How about the 9.4% drop in gas prices last month? Or the 3% drop in airfares? How about the 1.8% drop in bacon prices (thank the Lord!)? To be fair, they didn’t have much to do with the 2% rise in egg prices either. It is certainly true that inflation has cooled considerably since last year. The CPI is up a total of 0.9% over the last 6 months and if that keeps up, I’d say mission accomplished. But, relative price changes like these happen all the time and have nothing to do with real inflation, which is about the value of the dollar. Inflation is higher during times of dollar weakness. And the dollar has most certainly not been weak recently.

If you look over a longer time frame, you can see that last year we rose into the upper band of a wide trading range that has persisted since the late 1980s.

There are three zones within which the dollar has traded over the last 35 years or so. When the dollar is in the middle band, from roughly 90 to 105, the economy is fairly stable, nominal and real. When the dollar is in the upper or lower bands, the economy is vulnerable to crisis. The period from 2000 through 2002, the end of the last strong dollar period, corresponds to the unwinding of the dot com bubble and the various corporate scandals such as Enron. The S&P 500 was down all three years.

The period that starts in 2006 – 2009, when the dollar passes into the lower zone, is well known and requires no description. The period from 2009 to 2015, a weak dollar period, is one where we seemed to be always on the edge of another crisis. The Eurozone crisis – Draghi’s “whatever it takes” to preserve the Euro – was in this period and the US economy nearly fell into recession.

The period from mid-2015 to 2022 was another fairly calm period, COVID notwithstanding. You might notice though that we’ve just spent a good portion of 2022 in the upper red zone. Isn’t it interesting that this period echoes the previous uber strong dollar period from 2000 to 2002?

While we remember that earlier period as the unwinding of the dot com era, the dot com stocks were really just a side show. The real story then was the unwinding of the tech bubble, the one that existed in companies with actual revenue and earnings. We just spent the last year unwinding a bubble in crypto that looks an awful lot like the dot com stocks – no revenue or earnings or plan – and a bubble in profitable tech companies. You think that’s a coincidence? I don’t.

The inflation we’ve experienced over the last year was real – prices really did rise – but it was not one driven by a weak dollar. It was driven by the pandemic distortions caused by massive government intervention in the economy that affected both demand and supply to a degree never seen before in modern times. In a sense we had a supply and a demand shock simultaneously, although I’d put more emphasis on the demand side. Now, as the interventions fade – and yes they will fade over time – so will the effect. I would not expect prices to fall back to the previous level but the inflation rate should moderate – for now. With the dollar now back in the stability zone, the direction of inflation will likely depend on whether it can stay there.

The fact is that rate hikes have not had much to do with the economic slowdown and indeed hasn’t managed to slow things all that much at all on a nominal basis. It certainly hasn’t affected bank lending. With the QE bonanza coming to an end, banks seem to have gotten back to their roots of actually lending money. Total bank credit is up nearly $1 trillion in the last year and the lending is across multiple sectors. Real estate lending is up 11.3% ($540 billion) over the last year. And no, that hasn’t slowed recently with the slowdown in residential; the year over year rate of change is still accelerating. C&I loans are up 14.6% over the last year although that one may have peaked. Consumer loans are up 11% year over year. The year over year change in total bank credit is correlated with the year over year change in NGDP and CPI so the fact that its rate of change has moderated some recently would seem to be good news, as the drop seems to have mostly come out of inflation.

The slowdown in goods spending over the last year has been modest (-0.7% real) but entirely expected and offset by a rise in services spending (+3.5% real). You might remember me talking about that over a year ago; it wasn’t that hard to figure out. A big part of the recent slowdown appears to be nothing more than an inventory correction on the goods side of the economy. We knew there was a lot of over-ordering of goods during the pandemic as supply chains became strained and everyone saw the resulting inventory mess at Walmart, Target and a few other retailers.  Walmart appears to have solved their inventory issues, other retailers are getting there and inventory to sales ratios were already rolling over in October when we got our last full look at inventories. But if preliminary inventory numbers are any indication the correction is likely already nearing its end. By the way, this inventory correction is likely the source of the recent weakness in the ISM reports. The bullwhip effect we heard so much about last year so far looks more like a riding crop.

Having said all that, I would not get too comfortable with the economy right now. There is a modest slowing underway and it seems like everyone is bracing for things to get worse. Preparing for a recession could prove a self-fulfilling prophecy. Banks are starting to set aside reserves for future loan losses and it’s hard to envision bank lending continuing to expand at the current pace in that environment. Of course, a drop in the rate of change isn’t necessarily a bad thing if it moderates at say 5% growth. That’s where those healthy household and corporate balance sheets might come in handy. A tightening of lending standards, which we’ve already started to see, might not lead to much of a reduction in actual lending. In fact, it might be a healthy development.


The 10 year Treasury yield fell about 6 basis points last week; the CPI report was priced in. The short term trend is still down and the intermediate term trend is still up. With a plethora of economic data next week, we may get a clue about whether the intermediate uptrend will hold. Inflation expectations continue to moderate. 5 year and 10 year breakeven inflation rates are 2.18% and 2.2% respectively. The 5 year, 5 year forward (5 year expectations starting 5 year from now) breakeven is 2.16%. Last week’s CPI report did show inflation moderating but the market is exhibiting a high degree of confidence that future inflation will fall pretty dramatically from where it is today. Keep in mind that December’s extreme cold weather and the disruptions it caused are likely to affect the data.

The short term trend of the dollar is still down as well. The intermediate term uptrend is hanging by a thread. If the data for December comes in weak – and I wouldn’t be surprised by that at all – then it may finally break down. Still, I wouldn’t expect a dramatic downdraft. Speculators have turned pretty bullish on the Euro and are as long as they’ve been since the summer of ’20. Specs are still short the Yen, C$, A$ and Pound so there may be some more dollar downside but the Euro is the biggest weight in the index. If we move lower next week, I’d expect 100 to be good support.


It was everything up last week with commodities leading the way on the back of a big rise in crude oil (+8.3%) and copper (+7.8%). Crude looks like it has put in a bottom but that probably depends on the economic outlook. On that front, it is worth noting that Brent and WTI are both now in contango; demand appears to have weakened in the near term. It was easier to dismiss when it was just WTI but the Brent/crude spread has narrowed considerably so this is looking more like a demand problem despite last week’s rally. The contango is not deep so it won’t take much optimism to flip it to backwardation but for now, I’d be wary of the rally in crude.

The copper market has also flipped to contango over the last month, also an indication of weak near term demand. That seems odd with all the hoopla around China’s reopening especially with inventories low and a production shortfall expected this year. This bears watching closely as these are not the only markets that are showing weak demand. Again, though, the contango is small and is consistent with the recent economic data which has been weaker but not too weak.

It was also a week of more speculative activity with small cap and growth stocks outperforming strongly. The CPI report last week firmed up the consensus around rate hikes (February is now 94% chance of 25 basis points and the bet is that it will be the last one) and a soft landing is rapidly becoming the consensus. I’m reluctant to make that bet, at least for now. The economic trend is still toward weaker and until that changes I think you have to assume the trend will continue. The uptick in the University of Michigan consumer sentiment reading last week was encouraging but the near term data seems likely to continue to show weakness.

International markets also outperformed last week on a weaker dollar with Latin America and Japan leading the way. Latin America was up despite continued political drama with Peru and Brazil both seeing demonstrations against the current administrations. Japan was mostly a Yen story with the currency up 3.3% on the week. That could get interesting this week as the BOJ’s 10 year JGB peg is again being challenged.

The bet on a better economy shows up in the sector report too as Consumer Defensive was down the most for the week. Consumer cyclicals showed the biggest upside along with materials and real estate. Even technology joined the rally as semiconductors were up over 6%.




Economic Indicators

Corporate bonds were quite strong last week and credit spreads continued to narrow. High yield spreads peaked in July at nearly 6% and have now fallen all the way back to 4.29%. That is still above the lows near 3% set late last year but not worrisome. The market is obviously not very concerned about any potential economic downturn.

The Treasury yield curve is starting to normalize in the long end. The 30 year/10 year spread is now positive and the 10 year/5 year spread is down to just 10 basis points. The very short end of the curve continues to see 1 month bill yields rise while the 2 year continues to trade sideways as it has since late September. A re-steepening of the long end doesn’t mean much in the short term but if we start to see short term rates fall rapidly that is an indication the market is anticipating imminent rate cuts and would obviously not be a good sign. But we aren’t there yet so we remain cautious but not overly concerned just yet.

The Fed has spent the last year trying to convince the market that it would do whatever it takes to bring down inflation. Their preferred method of doing so has involved a pace of rate hikes like we’ve never seen. And inflation, as measured by the CPI, has come down. But correlation is not causation and the Fed’s rate hikes do not seem to be having much of an effect on credit markets where they presumably should.

We’ve had a period of good news on the inflation front lately and the markets like that. But continued high nominal growth means the path to an acceptable CPI rate of change is unlikely to be a straight line. The dollar has only just come down from the danger zone and a rebound from here seems likely, at least short term. We may well avoid recession this year but that doesn’t mean it’s all clear for stocks and bonds. And there are still fairly good odds on a recession. Stay cautious…for now.

Joe Calhoun

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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…



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.



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.  


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:


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%

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…



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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