How the Jobs Report Affects Rate Expectations With Noelle Acheson

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1:24And now to the top analysis of today's markets.

1:40how the jobs report affects rate expectations welcome to real vision daily briefing it's friday september 1st 2023 i'm ash bennington i'm joined by noelle atchison editor of the crypto is macro newsletter noelle always a pleasure to have you with us always enjoy these conversations ash so good to be with you today thanks for inviting me Well, Noel, we've got you here on a big day. Obviously, the jobs number coming out today. Labor market appears to be softening. Lots going on. You know, one of the things lots of people focus on is just this number. I know that you have a broader perspective. Give us the context for this number today.

2:15Tell us what it means and why it matters. It was a really exciting day. It's been a really exciting week, actually, Ash. We've seen quite a lot of signs come out over the past week, about 10 days, if you like. That hint that a slowdown in the very hot jobs market might finally be here. And lo and behold, today's unemployment rate ticked up higher than expected, notably higher than expected, at 3.8 percent. I said often, probably on your show before, Ash, that look back over time. When unemployment starts to move up, it moves up fast. And this is what the Fed has been waiting for. The big question, though, Ash, isn't really so much what is unemployment doing.

2:55It's one, is this move here to stay? And two, more important, what's the Fed's reaction going to be? That's what really matters because it's not so much the jobs market that's obsessing investors these days. It's what will the Fed do about it? Exactly right, Noelle. And the question that lots of folks are asking right now is, does this give them cover to hold steady this month? And then for how long does it go forward into November and December? Those are the big questions. By the way, we should say also payroll additions weakening 187 ,000 new payrolls added. And by the way, as you know, downward revisions for the last two months.

3:33Yeah, absolutely. And what's interesting, Ash, is that the market is taking this in a very, I guess, haphazard way, fractured way, if you will. We've got the expectations as priced in by the CME futures. That has ticked up for a hold, for a pause at the next meeting in September from 80 % just a couple of days ago to 93 % when I checked this morning. So you've got the futures market saying, yeah, we are definitely done with rate hikes. Looking forward over the coming meetings, again, the futures market is saying we are done and rate cuts will be coming early next year. Then you've got the bond market.

4:09You probably saw the Treasury yields. They dropped initially, especially in the short end, but they shot up right after. So you've got the Treasury yield saying, no, maybe we're not done yet. We think rates are going higher. Sure, there's a lot of other factors in there, but Treasury yield are heading higher. They're certainly higher than where they started the day. And you've got the stock market that seems to like the news as well. So you've got a lot of different messages coming out. You've got the stock market and the futures market basically telling the Federal Reserve, we don't think that you're telling us the truth when you say you're going to keep on hiking.

4:40We've got the bond market saying to the Fed, yeah, we hear you. We think we know where you're coming from. The Fed is, of course, looking at inflation, which, as we saw yesterday from the PEC figures, and we've seen on many other readings, not just in the U.S., but around the world, it's not done yet, not even close. Yeah, so well said, Noel. You're obviously talking about federal funds futures. This is something that the pros look at on Bloomberg, the warp function. But if you don't have access to a Bloomberg terminal, you can also go up to the Atlanta Fed and look at the expected three-month average SOFR, SOFR path.

5:15This is a secured overnight financing rate path. And what you can see is that number has maybe, at this point, it looks pretty horizontal at the beginning of the line, but maybe a little bit of a tick up, maybe another 25 basis points coming out toward the end of 23. And then it just drops precipitously. It's down. Let me see if I can see it on my screen. It's down another 250 basis points. These are material cuts that are being priced in when you look at this tracker on the Atlanta Fed website. What does that mean for people who don't have a strong background in macro, and why is it so important?

5:46Basically, it's the rate expectations that are driving investment theses across asset classes, across all asset classes. This matters a lot because it matters to whether credit will be available, what kind of monetary liquidity is coming into the market. And, you know, we all probably fondly remember the pandemic days, which were not fun, but certainly the liquidity that was being pumped into the market made any stock or stockholders and crypto holders feel very happy. We are looking forward to those days coming back. I think the market, especially the stock market, is expecting to come back much sooner than the bond market is saying that I personally agree with the bond market.

6:20I don't think we're going to get that kind of liquidity anytime soon. Of course, liquidity can manifest in many different forms, but the easiest, the most obvious, the big hammer, if you will, the rate cuts, I don't think that's coming anytime soon unless there is a terrible calamity and nobody really wants that to happen. It's an interesting story, Ash, and we can dive into this a bit as to what the Fed's priorities are going to be coming into an election year. Right. That is always a wild card, isn't it, to see what happens with regard to the election cycle. By the way, I should say the 2-10 spread coming in a little bit right now, this is a spread between two-year and 10-year treasuries, ticking into about a little bit narrower to minus 69 basis points.

7:03So again, still significantly inverted. I know we can go down this macro rabbit hole, and I know that you spend a lot of time thinking about this, Noel, but let's talk a little bit about the implications then for asset prices, why all of this matters, why investors care about all of this deep, wonky macro stuff that you and I both love. Wendy, as we touched on very briefly a moment ago, and you're right, I didn't fully answer your question there. Why does this matter? Because of the expectations for the driving forces behind asset prices. Always asset prices on the way up are driven generally by new money coming in.

7:36Where is this new money going to come from? When you have monetary tightening, when you have consumers slowing down spending because they're starting to be worried about their job, when you have corporates worrying about their financial balance sheets and for many of them, in fact, going bankrupt. So where's this new money that is going to propel the continued increase in asset prices going to come from? I don't think it's coming from anywhere. This is one of the reasons I'm particularly bearish on many asset classes. I think bonds are slightly in a different bucket at the moment. They tend to look at different metrics for their economic decisions.

8:09I think crypto is in a different bucket, perhaps not very short term. But once we're over this particular ennui, I should say, crypto will be in a different bucket. It's interesting also that we touched on earlier, Ash, the different messages coming from the bond market and the stock market slash futures market. The bond market going back forever. You remember when you started looking at macro stuff, they always tell you the bonds are the smart money. Watch the bonds. They're the smart money. They're the ones who are not influenced by narratives such as AI or things like that. They're the smart money to watch.

8:43Also, bonds tend to focus more on real income, real data, real yields, adjusted for inflation, whereas stock market investors tend to focus more on nominal. So are the bond markets here, as usual, telling us the real story, as in rates are going to be higher for longer? Or is it the stock market with their rather cheerful stories about the impact of some of the new technologies that you've been talking about on your show? Yeah, very well said. I think it's probably fair to observe that the bond market has the better long-term track record. Indeed. And again, everyone's going to say, oh, but things are different now.

9:18And yes, they sure are different, but bond investors are still bond investors. Stock market investors are still stock market investors. And so it comes down, Ash, to what are the rates going to be at the end of the year and what are they going to be at the halfway mark through 24? Is what the Fed is saying about perhaps another hike and no cuts in the immediate future the correct outlook? Or is the stock markets willfully ignoring that particular narrative? Is that where the real story lies? I mean, S &P 500 is up almost 18 % year to date here, and we're only in September. It's back to where it was before the hiking cycle started, Ash.

10:01This just blows my mind. In what universe is the outlook as good now for earnings as it was back then? And sure, I know you look through the humps to a year out, but even so, this is not taking into account the cost of the interest rate hikes on corporations, on the federal government, but also it's not taking into account what a hike in the unemployment rate is going to do to consumption. There is no way, Ash, that corporate profits are going to continue to justify the stock market valuations they have when consumers are starting to fear for their jobs. Yeah, let's talk a little bit about that because NASDAQ Composite up 35 % year to date, Nasdaq 100, obviously a subset of the largest companies in the Nasdaq composite, up now 42 % year to date.

10:53I mean, these are just absolutely mammoth gains. And, you know, let's celebrate them. That's fantastic for stockholders. But the question always is, what's going to happen going forward? And this spills over into other asset classes as well as into economic predictions. because you remember what it's like, Ash, when you're seeing headline after headline about stock market cataclysm, stocks down 10 % in a day kind of thing. If you're doing a supermarket shopping for the week and you're seeing this as you're waiting to pay, that's going to make you perhaps want to spend a little bit less because the headlines are screaming doom and gloom at you.

11:31And then you combine that with, you know, friends who are losing their jobs or if maybe you're worried about your particular situation as well. So that's going to reign in spending as we start to see unemployment really tick up because reining and spending affects profits, which affects layoffs, et cetera. It's a vicious cycle, which is why I said at the beginning, unemployment, when it moves, it does move fast. That's it. There's a caveat. If I'm just going to start a caveat, this 3.8 % figure that we saw this morning, which was a very big jump from the 3.5 % in the previous month, maybe it's a blip.

12:02To be honest, I don't know a lot. I've heard a lot of people talk about the impact that the SAG-AFTRA strikes may have had on this particular figure. It seems a hefty hike for that one-off, if I may. The yellow bankruptcy also, I've heard that cited as a factor that might have impacted. Well, that's not as temporary, unfortunately. So what are we going to get in the next one? If the next one goes up even further from here, that's a very big shift in the narrative. That's going to make the Fed perhaps rethink their plans for another hike before the end of the year, maybe pause and wait and see what happens the first quarter.

12:40It is also going to start to intensify the political pressure. You can't really have rising unemployment in an election year. You just can't do that. And that brings in the fiscal question, which is probably Jerome Powell's nightmare at the moment. Well, that's a whole different thread. Explain what that means. The fiscal question, again, you can't have poverty in an election year. And so fiscal measures could perhaps get through a very divided Congress if it means it keeps people warm and fed. I mean, that is something that we can all get behind no matter your political allegiance. Right now, it's very difficult to get any spending plans through Congress because of the divided nature of politics.

13:23I've never seen it like this personally. But also, there's just little wiggle room. There was a recent downgrade of U.S. government debt. There could be more in the offing. That's just embarrassing on the international stage at a time when the geopolitical situation is arguably more fraught than it has been for decades. And when it comes to fiscal spending, right now, mandatory spending plus interest payments pretty much take up all of the revenue. And you can argue that you're going to have less revenue if there are less corporate profits or even less corporations paying tax and less income tax as well on the individual side.

13:59So less revenue foreseeably for 2024, higher expense, mandatory plus interest expenses, because rates are certainly higher now. means there's very little discretionary room. So any new spending, even if it is to keep people fed and warm, which we can get behind, any new spending is going to come through debt. There's going to be more, even more debt financing than is already on the books. And who is going to buy those bonds, Ash? Is it going to be an American public who's already feeling the pinch for a session? Is it going to be foreign investors? We know China and Saudi Arabia have been selling recently.

14:42Or is it going to be the Federal Reserve? We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

14:56Boy, what a perfect segue. It is something that I wanted to talk about here, which is a conversation between Andreas Steno-Larsen and Dennis Lockhart on Real Vision. This comes to us Monday. It's called, Will the Fed Continue to Embrace a Longer-Term Hawkish Stance? Right here on Real Vision Essential tier, I believe. Let's take a look at that. There have been a lot of academic studies on that question and how many basis points X amount of balance sheet shrinkage amounts to. In my experience, at least, nobody came up with an absolutely conclusive number. It's an important policy because I think the committee feels they simply have to get the balance sheet down.

15:40And what I find interesting in the most recent discussion, although it did not come up in Powell's speech last Friday, is the notion that was actually put forth first by Lori Logan of the Dallas Fed, that they might continue to shrink the balance sheet even after starting rate cuts, meaning two tools of policy are arguably going in opposite directions. That discussion has continued, and it was actually in the last minutes of the July meeting. So it's an interesting development that they feel so strongly about the balance sheet that they wouldn't pause that program if they began to cut rates. All right.

16:28This is a fascinating question here posed by Dennis Lockhart, formerly the president of the Atlanta Federal Reserve Bank, which we just cited data from a few moments ago. I know this is a little bit of a technical question, so let me set this up. So right now, obviously, interest rates have risen from near the zero bound, near the zero lower bound, up to 525 to 550, a significant increase in a relatively short period of time. So you have rates not just rising dramatically, but rising dramatically over a relatively short period of time. Contrast this with the Federal Reserve balance sheet, which is still above$8 trillion.

17:00If you look at this chart, you can go and see it on the Federal Reserve Bank at St. Louis, the FRED database. You can see that just dramatic spike up from about$800 billion prior to the global financial crisis. Up right now, down off its highs, which closed at nearly$9 trillion, to about$8.1 trillion. This is still an enormous amount of money. Obviously, this all has stimulative effects. And yet you have rates rising. Locker talking about the relationship between rates and the balance sheet, how it's not really an exact science trying to price what means what. You know, Noel, big picture. How do you think about this?

17:38Rates rising, but the balance sheet staying remarkably elevated despite a rising rate policy. Remarkably elevated is certainly the way to put it. Yes, the Fed has been selling debt into the market for what, the past year now, if I recall correctly. but they barely scratch the surface, drop in the ocean. One of the other factors affecting Treasury yield at the moment is the Fed's running off its balance sheet. But when it comes back to the question that was just asked, can the Fed continue to run off its balance sheet no matter what happens to inflation rates or everything? And the hypothesis that it has to, it just has to, because it promised it will, yes, And it would be nice for the Fed to keep its promises for its reputation and its credibility.

18:24But, Ash, it's going to have to choose. It's not going to be able to, one, continue to bring inflation down by holding rates high and to continue to help the U.S. government. I know it's supposed to be independent, but let's face it, it does have to help the U.S. government. And by buying the debt that the U.S. government is going to have to issue, because this is the unspoken third mandate. We've touched briefly on the Fed having to juggle the need for stable prices, which means bringing inflation down, and maintain full employment. It's a trade-off. You can't have both. Not in a market where you have supply chains somewhat constrained or vulnerable to abrupt changes, shall we say.

19:07Just read the headlines every day. So you have the Fed choosing between stable prices and full employment. It's choosing stable prices because that is what its reputation relies on at the moment. that and only that. And Powell has said many times unemployment affects many people, but inflation affects everyone. He's unfortunately and tragically correct in that. The third unspoken mandate, and this is where the Fed continuing to run off its balance sheet comes into play, is financial system stability. I don't think the Fed can continue to run off its balance sheet when you have the U.S. government issuing a ton of debt to keep people fed and warm.

19:46It just can't do that. It has to step in and buy that debt. Else we're going to see bank collateral seriously hit by the hike in yields, which leads to a decline in prices. That is going to be necessary to entice investors to buy the flood of issuance that's coming. Well, you know, between the two official stated pieces of the dual mandate, it's kind of pick your poison. Which direction do you want to go in? But when you factor in the financial stability, the systemic stability, does it become essentially an impossible trilemma where the Fed has to optimize for three variables simultaneously that they just are not able to do?

20:23Absolutely. And that's why I think it's going to have to choose to sacrifice, unfortunately, full employment. We know that a lot of people are painfully going to lose their jobs. This is just not good. But there are ways that the federal government can help. The most important thing is to bring inflation down because that does impact financial stability as well, just through its effect on collateral. And it's collateral that keeps the market humming. Yeah. Talking of questions, I want you to take some questions from our audience now because we've got some lined up and they are quite good ones.

20:54The first one comes to one of our regular viewers, Ralph Humphrey on the Real Vision platform, wants to know what's her view on what's happening in European markets. Does she have an opinion also on commodities? Hi, Ralph. Well, I'm actually in Europe. So, yeah, I do have a view on that. I live in Spain and we've been paying a lot of attention to our inflation rates here. Spain was one of the leaders and look how great this new inflation rate fall is. How good are we? Without disclosing that was entirely due to manipulated energy prices. We're seeing the other side of that now with the fear sub-tick, but we're seeing fear sub-ticks in inflation and other key economies as well, such as France, such as Italy.

21:31Germany had a few of its regions surprisingly upside as well. And the European expectation, EU expectations, sorry, I should specify EU expectations for inflation are also higher. It's not looking good over here in Europe. And the stock markets are probably going to get hit by that. They were rising this morning largely because of the commodity impact, which is a nice segue into the second part of your question. I'm fairly optimistic on commodities because I think we're blowing the Chinese slowdown out of proportion. We're starting to see signs that the decline in manufacturing may be bottoming.

22:06I think it's too soon to call that personally. But we're going to be pretty sure that they're going to do what they need to do within certain parameters. And even if they don't meet the 5 % target, that's a big social cost for a premier shooting thing. But 4.9%, 4.8 % is pretty darn good growth anyway. It is still a hefty growth. It's less than was hoped for. But that growth is going to drive demand for commodities at a time when supply chains are still constrained, at a time when you do still have to contend with oil production cuts, and at a time when a lot of new mines have not yet come online.

22:43So I'm bullish on commodities, not so bullish on the European stock market, and somewhat skeptical that the efforts to bring inflation down are anywhere near done, much like in most of the world. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

23:05Well, we've got another question. I'm just going to skip out of order here because this is one that is exactly to that point. This comes to us from Fat Hulk Ride E-Byte. Why is no one talking about energy? You know, I'm looking at WTI here, 85.65 right now. This is CL1 New York Merck Futures, October 23. Pretty significant ride up from the summer. Call it early July, coming in at about 69 bucks. Now we're trading at 85.64. This is a considerable run up here when you look at this over the last few months alone. And by the way, let me ask you this question also. Is this about organic supply and demand factors?

23:45Are we starting to see the cost of money here creeping in? I think it's organic supply and demand more than the cost of money, but there's a lot of politics in there as well, as in there is just not a lot of new supply of the fossil fuels coming on stream because you can't get financing to spin up new fossil fuel productions because of politics. But talk about that because it's such an important point. I will. Before I do that, though, what you just mentioned, Ash, the WTI is at its highest point so far this year. It's at its record for the year. And just what is that going to do to the inflation base rate?