Good Tuesday AM,
No data today and markets have gained back most of what was lost yesterday.
Again, it is never going to be a straight line up or down but for now, we in a trading channel leaning toward lower rates. Let’s keep it going. There is not much to say other than to stay alert if you are going to float. Lots of fed speak this week with Fed Chairman Powell on the mic tomorrow.
There is one piece from the notes below that I want to highlight. This is an amazing (bad sense) commentary on the economy. The end result of this will likely be lower rates.
Being self-aware, I know that I am boring. You will know that as well as I share this piece from Bloomberg which I find really interesting…
I wrote about it yesterday, but last week felt like a real turning point. Between the cool economic data, and the dovish-sounding press conference from Powell, people are taking very seriously the idea that the next move by the Fed will be a rate cut. The rate cut talk of course produced a big rally in stocks (the Nasdaq is up 39% on the year once again) and a powerful move lower in rates. Of course, this isn’t all “good” news. As mentioned the labor data came in cool. There are more signs that the extraordinary jobs boom is coming to an end. It’s not just that the economy is creating fewer jobs and the unemployment rate is going up, but wage growth is decelerating as well. Nominal incomes are slowing. With the official U3 unemployment rate hitting 3.9%, there’s been a lot of talk about the Sahm Rule. As its creator Claudia Sahm put it on Twitter, the rule simply states. “…when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months, we are in a recession.” We’re not yet there. So that’s good.
But on the other hand, any meaningful rise in the unemployment rate does offer some reasons to worry. If people who want to be working can’t find jobs, they’re going to spend less. If people spend less, that’s someone else’s income going away. And then that theoretically means more job losses. So the point is that the unemployment rate has a tendency historically to snowball. It’s pretty basic stuff, but makes seemingly marginal moves in the unemployment rate a big, blinking caution sign.
In a note to clients yesterday, Steve Englander of Standard Chartered offers up his own modified Sahm Rule, which goes:
Our version of the rule is triggered when the 2mma of the unemployment rate rises by 0.4ppt or more relative to its minimum over the past year (Figure 1). It does not differ from the Sahm rule much but will be slightly quicker to signal that a significant UR increase is coming. The cost of the ‘nimbleness’ is that our signal could have a tendency to give more false signals of impending UR increases. However, the only false signal in the last 55 years came when the UR nipped higher near a peak in 2003, not when we were looking for the UR to rise from a trough.
Here’s his chart:
Perhaps you can quibble with the best calibration is, depending on the purpose. Claudia Sahm herself developed the line of thinking as a means for coming up with a theoretical timing mechanism for sending out automatic relief checks. Again though the core idea here is that historically, seemingly modest increases in the unemployment rate tend to be predictors of large increases in the unemployment rate and recessions.
So going to the rate cut talk the two questions are really:
A) Is the labor market flashing a warning sign?
B) If it is flashing a warning sign, can the Fed cut rates and arrest a downturn?
Say what you will about the rise in interest rates over the last year and a half, but we’re not at ZIRP anymore, where the Fed has to resort to exotic things like QE in order to try to stimulate the economy.
Good old fashioned rate cuts are a tool that may have some teeth and if timed right could forestall a deeper downturn. But given that inflation is still running hot, nailing the timing may be tricky.
Please remain safe and healthy, make today great!