Markets send mixed signals

0:08US markets are a little bit weird at the moment. Rates markets are telling us that investors think the Federal Reserve will cut maybe six or seven more times in the next year, which generally means bad stuff is coming our way. But stocks are still flying pretty high, even despite a flare up in geopolitical heat. Meanwhile, the latest jobs data from the US tells us that the economy is smoking hot. Today on the show, we're asking, what is with all the mixed signals and what are we supposed to make of it? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets economist here at FT Towers in rainy London.

0:51I'm expecting a decent soaking on my way home tonight on my bike. And hooray, Rob Armstrong off of the Unhedged newsletter is back by dope demand. He's been doing some real shoe leather reporting, as we journalists like to say, taking the pulse of the US economy. Rob, did you find a pulse? Uh, shoe leather reporting may flatter me a little bit. What I did is I went to a humongous mall in Pennsylvania and kind of looked around and talked to people and looked in stores and generally thought about things. It was more like I went on a trip to contemplate the US economy rather than actually doing any hardcore reporting.

1:33What's your best anecdote from your time on the road talking to real America? That is a good question. Well, I'll tell you this. I'll pose a puzzle to you. So I went to this huge mall and all the stores in the mall open at about 10 in the morning. And I was like just walking up and down this humongous mall. It's like a mile long. There's 450 stores. I didn't see anybody do a transaction until like 1145. So why do they open all the stores at 10? Let me put that as a puzzle to you. Is it because, well, the employees have to be there to fiddle the stock around anyway or do something. They might as well open the door in case there should be a customer.

2:12But nobody goes to the mall at 10. Why do the stores open at 10? You know, it's a weird thing. It can be like Black Friday. It's true. Not every day. This was on a random Thursday, but I was quite struck by that. But man, Americans will shop that place by 2 in the afternoon. The place was jumping. People were buying stuff. The American consumer, as judging by the King of Prussia Mall and King of Prussia Pennsylvania, is just fine. Thanks very much. Never underestimate the American consumer. Now then, let's start at kind of the beginning. Is the U.S. overheating? Because thems were some scorching jobs numbers we had on Friday.

2:52No, it's not overheating. I mean, the great motto of the Unhedged Newsletter, there's two mottos. One motto is calm down. And the second motto is one month is just one month. So we had like three months of very... Omijom. Omijom. That's how we say it. Omijom. You know, we had three months of pretty middling job numbers. And then we did get a pretty jump in report for September. But, you know, there's a lot, there's a big margin for error in these surveys. And, you know, as we've seen in the last six months or so, these numbers hop around. So until you get three strong months. But, you know, this one was hopping though, right?

3:33So the U.S. 256 ,000 jobs or something like that. Twice. I think it was 254. But anyway, that's a lot of jobs. And the unemployment rate came down to like 4.1, just edged a little bit. Yeah. And, you know, the jobs were spread around the economy. You know, it was leisure and hospitality. It was everything. So, you know, it was a good report and, you know, the markets really responded. And the funny thing is, before that report, everybody was like, well, there's a secret slowdown in the economy that's coming. It could even be a recession or whatever. There's cracks in the edifice or, you know, a metaphor of your choice.

4:20And then we get this one report and it's like it's overheating. Inflation's coming back. you know and so it's like we're all over the road in terms of sentiment here we are all over the road and like the thing is though it is quite a weird situation where you've got jobs numbers absolutely blasting through expectations and it's worth noting that july and august got revised up somewhat as well like straight after the fed just cut benchmark interest rates by half a percentage points and it's like something that's not right with this picture but it also in terms of the market reaction you just mentioned, like, this is what investors are constantly saying to me, which is that the Fed is data dependent, right?

5:02It doesn't really have a plan. It's responding to data points as and when they come in, which means that the market has to respond to data points as and when they come in, which means we're all just getting like pinged around all over the place on every data release. And it's exhausting, frankly. Yes, it is exhausting, but I think it's the best you can do, right? What else is the Fed supposed to do except respond to the information that it has in front of it. Right? I mean, I want them to take a slightly longer term view and look at the average of several reports rather than making the mistake of getting too excited about one month.

5:35Being data dependent is quite jarring at times, quite volatile at times. But the other option is just being an idiot, which is not as good. You know, it's works for you. Well, I've done a lot of field research on being an idiot. And it's mixed outcomes so far, Katie. Let me just say there are a couple of other things. No, I'm interrupting you, Katie. Don't interrupt me while I'm interrupting you. Go on, then. Go on. There are a couple of other things that are suggestive that the economy in the U.S. and the world might be heading for faster growth. Not to say overheating, but let's say faster growth.

6:19One thing is, at least until today, there was the first spark of excitement about the Chinese economy that we've had in a long time because the government said, we are going to do things to make things better. And the stock market went bananas, which affirmed this signal that maybe the Chinese government will do fiscal stimulus or something that will start this economy. So that got people excited. And the commodities markets have followed. Copper's had a decent month, though it hasn't had a good week. Oil is up. That's, of course, involving the war. But there is some signs of affirming kind of picture out there other than just one U.S.

7:00jobs report. One of the things, though, that is really tricky to get your head around with the U.S. is if you look at PMI surveys, right? So like kind of purchasing managers index surveys, like where basically you go to like people who actually do real things at real companies for a living and say, how cheerful do you feel about the future? Do you have more orders this month than you had last month? What are your inventories? Stuff like this. So if you look at like manufacturing PMIs are like. Yeah, terrible. Nasty. Tells us like contraction is coming. It's really horrible. Whereas services PMIs are like, woohoo, party time, you know.

7:39So we've got like services PMIs at like 55, manufacturing at 47. Yeah. And for our listeners, 50 means things are the same. Anything above 50, things are getting better. Anything below 50 means business is getting worse. It's a little kind of arbitrary. So why is manufacturing getting worse? It does seem weird. Ever since the pandemic, we've had weird changes in goods demand, right? Because for a while, we were all locked in the house and we ordered so many goods. So many Pelotons, so many air fryers, so many, you know, because what could you do? I never got into this air fryer thing. Yeah, I don't even know what it is.

8:17Yeah, people have them. You can't fry with air, you know. It's stupid. This is a hill I'm prepared to die on. Anyway, and then it's like now you have all the stuff you need, right? So then, you know, you've had too much goods demand and then not enough. And so I wonder if we're still dealing with kind of waves of too high and then too low goods demand that is affecting the manufacturers. So we've like bricked ourselves into our own homes with Pelotons and air fryers and other such nonsense. And we're still in the like, now let's go do the things we couldn't do phase four years later. And also like maybe it's just the United States is ever becoming more a service driven economy.

9:02I mean, that's the most obvious explanation. Yeah, it's all about going out for dinner and going to bars and I don't know, whatever it is you Americans do with your spare time. Yes, that's about it. Go and watch American Bulls books. Go to the mall, we go to the bar. Yeah. Okay, let me throw another weird variable into the equation. If you ask Americans, how's the economy, which the University of Michigan has done every month since the 1950s, Americans say it's crap, which is partly weird and partly not. So if you look at the history of the University of Michigan Consumer Sentiment Survey and you superimpose over it inflation, inflation really makes people feel bad about the economy.

9:44Yes. And although inflation is gone in terms of price growth, we've had a big shift in the price level. Everybody's pissed off. That's normal. But in the past, when sentiment has been as bad as it is right now, we have not only had inflation, but we've had stagflation. We've had inflation tied closely or loosely to recession and job losses. And right now we have the opposite. So it's like we don't care. We're so pissed off about inflation. We don't care about how strong growth is or how many people are employed. We're still pissed off. Right. But even even though people are like pissed off about inflation, which I get, the evidence is that Americans are still spending.

10:30Right. Household consumption is like back to pre-COVID trends. A hundred percent. In the U.S. I saw it at the mall. It's not in the U.K. It's not in Europe. So I just don't understand what is with this like weird thing with Americans at the moment where they're like, everything's going great. The economy is absolutely like roaring and people are determined to be cross about. They're cross. But, you know, when we are feeling bad as Americans, you know, we go shopping to console ourselves. I think that's as simple as that. Like, you know, if a humongous flat screen TV isn't going to make you feel better, you know, what is?

11:06But no, I mean, I joke. And this is a cliche. Americans are just consumers, blah, blah, blah. But it is striking that Americans are shopping like they are happy or consuming like they are happy. But when asked whether they're happy, they say no. And of course, this will be important in the upcoming election. Are you happy, Rob? We want you to be happy. I've never been happier. I'm feeling great. I'm feeling great. But so what are markets supposed to do with all this? So since we had those like super sore away jobs numbers a few days ago, some of those rate cut expectations have come off a little bit.

11:44So the market is saying, OK, maybe we don't need quite so many rate cuts because maybe we should cheer the heck up. And actually, there has been a big change in the two year treasury yield. And as you know, Katie, but our listeners may not. any time you say the phrase two-year treasury yield, you have to append the phrase Fed policy sensitive two-year yield. Policy sensitive two-year. Yeah. It just comes as one phrase. So the two-year yield tells you what the market is thinking about what Fed policy is going to be. And the two-year yield has gone way up. Last time I looked, it was a hair under four.

12:26It had been at like three, six or three, five. And so what that's telling you is people saw this jobs report and were like, whoa, whoa, whoa, we may not get all these rate cuts we thought we were going to get. Right. Maybe the Fed doesn't have that much room to cut because if they cut much more than they already have after they went and did 50 last month, 50 basis points, they're going to get an inflation surprise, right? So they're going to find out, they're like, oh yeah, we're going back to three or whatever they predict is the long-term rate. They might not get all the way down to three. Something bad might happen on the way, specifically a bad inflation thing.

13:06So we've got a situation where stocks are doing well because rates are going to fall, but rates probably aren't going to fall quite so much. That's what the two year is telling you. So, I mean, I can't square this circle. I really can't. Someone's wrong somewhere. No, someone is wrong. Probably us, someone on the internet, someone somewhere is wrong. I mean, the thing that is unsettling about this is that stocks are just sort of bouncing along at all time highs. And you sort of wonder if we were wrong to expect as many rate cuts as we did. If we were wrong to think that inflation was going to come down as easily as we thought it was, surely something about the valuation of stocks has to change.

13:56But every time I say sentences like the one I just said, stocks laugh in my face and proceed to go higher. So because you would think. I'm not sure we're helping people much here. And I think part of it is, you know, we're starting. earnings season, Katie. So we're going to find out. We have the banks this week. We're going to start finding out whether stocks can perform well enough in terms of earnings that the stock market can stay high. Show me the money, corporate America. Yes. That's what I say. I mean, is this, how normal is it for consumer sentiment to just like split away so much from actual spending?

14:42Let's talk about it in terms of unemployment, which is kind of a tidier number than consumer spending. If you look at a long-term chart of consumer sentiment against the unemployment rate, the lines go generally, historically, in opposite directions. Low unemployment, high consumer sentiment. That makes sense. Right? And that is a pretty consistent pattern through history, as you might expect. The first step to being happy in a capitalist economy is having a job. Since the pandemic, almost uniquely right now, we're experiencing a moment where we have historically low unemployment and sentiment is still lousy.

15:22It's new. And I don't know, maybe that's normal five years after a big pandemic. Maybe we're still getting over the sting of inflation and things will normalize soon. but this combination of a very low unemployment rate and i should say that consumer sentiment is getting better it's not as bad as it was in 2022 when it was like the worst it's ever been but it's still quite low and it's not trending better very quickly this is a strange combination historically and i'm not sure what to make of it i have no tidy explanation for it you have to come up with one. Yes. You know, that's your homework for next week.

16:02Okay, next week, I'll have a grand unified theory of consumer sentiment and unemployment prepared for you. I look forward to that. You can start thinking about that now. We're going to be back in a sec. But first, while we've got you listeners, we're very excited to have been nominated for a Signal Award. Rob Armstrong, did you know that? I am delighted, but not surprised. I think we deserve to get a pile of awards that's 10 feet tall. Well, look, if this is your favorite finance pod, listeners, I'm sure it is, then there's a link in the show notes. Check it out. Click the button. Vote for us.

16:39We'd be very grateful. We're going to be back in a sec with Long Shorts.

16:56Okie doke. It is time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. Rob, what do you got, long or short? I am short Spirit Halloween. Now, you, Katie, as a person from a strange island in the middle of the North Atlantic will not know what Spirit Halloween is, but Americans will know. Spirit Halloween is a store that shows up only at this time of year. If you need your affordable pizza rat costume, New Yorkers will know what that one is. You can grab it at Spirit Halloween. And I'm not short this business. I have no idea whether this is a good business or a bad business, how much money it makes.

17:33but I am short any place this spooky store shows up. Because if there's a space in your neighborhood for a Spirit Halloween, it means there's vacant stores and the rent is cheap. And at the last minute, Spirit Halloween can just rock up and say, I'd like your building for a month or whatever. So the weird thing is this spooky store actually is an economically spooky event when it appears. So the big spooky Grim Reaper motto guy who's on the sign in front is actually an economic Grim Reaper in reality. On a similar note, I am long monsters. Great.

18:20So as you mentioned earlier, Chinese stocks had a bit of they've had a bad day because like the second round of information coming out of like authorities in Beijing around stimulus. The previous announcement in which we said we were going to save the world was not true. Well, so the markets initially went crazy. Like stocks absolutely shot higher. Today we were supposed to get like more information around what the authorities were going to do. Markets didn't particularly like the look of that. It wasn't detailed enough. So like some of the stocks in like China and Hong Kong fell really hard. The reason I bring up monsters is because we had a quote in our story about this from one Alicia Garcia Herrero from Natixis.

19:01who said, and I quote, this is what happens when you feed the monster. Every day you need to increase the amount of food or it turns against you. I thought that was quite apt. So I'm long monsters. I have twin 16-year-olds, and I endorse that phrase. The thing with children is you need to feed them. Constantly. And every time it's more, you know. Yeah. They're a real drain. Anyway, on that cheerful note, let's wrap up. We listeners will be back in your feed on Thursday, because it's Tuesday today. Yes. So it'll be Thursday. So yes, by which time the economic narrative will have changed completely.

19:43So we'll have plenty to talk about. Either Rob will have figured it out, or it will all have changed again, and we don't need to bother. So for that sort of insight, and more, tune in again on Thursday. We'll see you then. Unhedged is produced by Jake Harper and edited by Brian erstat our executive producer is jacob goldstein we had additional help from topher forhez cheryl brumley is the ft's global head of audio special thanks to laura clark alistair mackie greta cone and natalie sadler ft premium subscribers can get the unhedged newsletter for free a 30-day free trial is available to everyone else just go to ft.com slash unhedged offer i'm katie martin thanks for listening

20:33We'll be right back.