Episode 126

Which Employment Statistics Should We Believe?

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

For January 2024’s IBKR Economic Podcast, Andrew Wilkinson, Director of Education, hosts his colleagues Jose Torres, Senior Economist, Steve Sosnick, Chief Strategist, and Joe Burke, Head of Global Fixed Income Trading in a wide-ranging discussion about jobs, inflation and earnings.

Summary – IBKR Podcasts Ep. 126

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this week’s Economic Podcast from Interactive Brokers. Joining me, Andrew Wilkinson to discuss US economics this week, are Steve Sosnick…

Steve Sosnick

Hello

Andrew Wilkinson

Joe Burke…

Joe Burke

Hello

Andrew Wilkinson

… and Jose Torres down in our West Palm Beach office. Welcome everybody. Hi Jose.

Jose Torres

Hey, how’s it going?

Andrew Wilkinson

Good, good, good, good, good.   We’re going to start with the last week’s Payrolls data. It’s been a very ho-hum start to trading equities, as they really struggle to continue the strong year-end rally.  Bond yields rose, making them more appealing, but the big issue now seems to be less of whether there will be a recession for the US economy, but more about the timing of a potential easing cycle from the Fed. Jose, let’s start with your take on the December Employment Report and just unpack it for us.

Jose Torres

Sure. So, the headline number came in significantly above expectations at 216,000. Most of the job gains came from non-cyclical areas: education, health services and government. The Household Survey also depicted significant weakness. A lot of part-time work is going on, a lot of folks with multiple jobs, and that drove a 40,000 gain in the leisure and hospitality sector where a lot of the workers are part time.  But overall, when we look at the totality of the data — BLS jobs, ADP, jobs, job openings, unemployment claims — we’re still looking like we had a stronger labor market than the Fed would like. And overall, companies on the earnings calls, they don’t want to reduce their scales of operations. They want to continue to earn returns, albeit with lighter margins. So, we’re not looking like we’re gonna get a layoff cycle anytime this year.

Steve Sosnick

You know Jose, one of the things that struck me on Friday was that the market reacted so strongly to the ISM data.  I’ve never really seen the ISM Employment Report sort of supersede the payrolls data. What’s your take on that?

Jose Torres

You know, Steve, on Friday, I called the yield retreat a head fake. I thought it was a ridiculous reaction by market participants, because like I said earlier, the totality of the data still points to a labor market that’s incredibly tight.  And to your point, ISM Services typically isn’t the main data point when examining labor markets overall.  However, like you always say in your commentaries, market participants are addicted to liquidity. They’re looking for any data point that fits the narrative of the Fed cutting in March, right? And on Friday, that data point was ISM Services, with employment coming in at 43, which is a significant contraction. The contraction/expansion threshold is at 50.  New orders were still strong, telling the story that people are spending on services. Prices were still strong, came in around 56.  I know some folks checked in with ISM to see if that was an error or not.  Here in this business, you know we have a lot of data flying at us, and overall, everything is showing that the labor market is still tight. The real-time indicators as well, like Indeed job postings, stuff like that. And unless we start to see all the labor market data points show significant weakness, I think the ISM Services is just a one-off.

Steve Sosnick

I think selective listening also comes into play in a situation like that.

Andrew Wilkinson

Well Steve, employment’s one thing, but the FOMC’s really concerned more about inflation, and specifically falling back to that sub 2% target.  How is the stock market digesting that apparent reduced potential for rate cuts in 2024?

Steve Sosnick

They’re in denial about it. I mean, the Fed has a dual mandate. And as you noted, it’s full employment, non-inflationary employment, and stable prices. We can argue that the full employment mandate, if not perfectly met, we’re close enough.  I would say “Mission Accomplished” on that one. So, we’re worried about prices and they’re still not at the Fed’s target level. But to me what’s become fascinating is that the Fed, at the last meeting, acknowledged that they might pivot.   The dot plot is acknowledging three to four rate cuts — three rate cuts as a median, potentially more, potentially less.

The market, of course, was already at three to four before the Fed spoke, and then said, “We see your three to four. We raise you to six. We actually raise you above 6.”  We’ve since come back a little bit below that. To me, those are conflicting narratives.  In my mind, you can’t have an economy robust enough to deliver the type of earnings growth that’s priced in — call it solid single digits, maybe even double digits in certain areas — and get six rate cuts. To me it’s an inconceivable conundrum — you can’t do both. So, we have to figure out what it’s going to be. We’ve started to back off some of the most aggressive rate cut expectations, and as far as I’m concerned, I’d much rather see a solid economy than feed investors’ rate cut addiction. But you know, let’s see. I think overall we should all be rooting for a better economy and rooting a little bit less for aggressive rate cuts.

Andrew Wilkinson

Joe, in terms of yield at the end of last year, we had 5% yields across the screens down all the way to what, about 3.85%, right? Unpack that for us.

Joe Burke

I would say there’s a couple things going on. You know, obviously there was an enormous fear of missing out, as you mentioned, towards the end of the year. The other thing is, where there’s a lot of uncertainty about the economy, to Jose’s point about labor, that’s fine. But you have bank earnings coming out this week. There’s going to be a lot of focus on what’s going on with the consumer.  Are the delinquency rates really rising? You know we’ve also seen rates go lower. We’ve seen the curve flatten. So, we’re about 20-25 basis points flatter than we were in December. So, the rate cuts, while they’re still expected, it’s only a 63% chance of a 25-basis point cut in March. That’s down significantly. Again, CPI, bank earnings, those are all going to play into the focus.  It’s really unclear in terms of the direction of interest rates at this point.

Andrew Wilkinson

So, we see mismatched timing between what the Fed’s looking for in the SEP projections that came out in December versus what the market’s looking for.  There’s a whole one year gap.

Joe Burke

That’s correct, absolutely.

Andrew Wilkinson

Steve, will you be watching financial earnings starting this week?

Steve Sosnick

Yes, but.  My specialty, when we were making markets, was that I was the guy responsible for all the banks.  It always bothered me that banks went first, because I think that while banks can tell a broader economic narrative, I think it’s probably more important for Joe and Jose watching fixed income and the economy.  I think actually bank earnings are terrible harbinger of earnings season from a stock point of view. Because who else is that reliant upon interest rates?   And no one else is reliant upon trading profits.  Plus, the market also has a way of looking through trading profits or losses just in strange ways. So, I think they’re sort of too idiosyncratic to tell us what to expect from earnings overall.  But, they’re good benchmark in terms of what the conference calls are telling us, what they’re saying about their clients, etcetera, etcetera. And that that falls more into the other guys’ purview than mine, I would say.

Andrew Wilkinson

Jose, any particular sector you’ll be watching as a harbinger of doom or better things?

Jose Torres

Right now, what I’m watching closely are dynamics near the Red Sea. We’re seeing trade shipments increase significantly, container ships from China to Europe and from China to the US. We saw the CPI trough at around 3% in the last few months. If we get goods reinflation, then that’ll incrementally delay the Fed’s cuts, you know, maybe back to May or even June for the first one. So that’s what I’m really watching closely, to see if this recent loosening in financial conditions starts to reignite inflationary pressures overall.

Steve Sosnick

The one thing that I would love to find out about from both of you guys is with CPI and PPI coming out later this week, do you feel that that’s going to change the story at all, whether in terms of bond prices or in the economic narrative?  Let me go with Joe on bond prices.

Joe Burke

I definitely think it could. The expectations for the CPI are actually higher than previous months’. If it comes in a little bit hotter than expected, it could really change things. I’m not sure that a lower number is going to make much of a difference.

Steve Sosnick

Gotcha. Any follow up Jose?

Jose Torres

Sure. I think the risks are skewed to the downside in terms of markets, with higher yields and lower stocks, because we saw the CPI come in at 3%, and now this week I’m expecting it to come in at 3.3%  So if the market starts to see that medium-term inflation is gonna get stuck at around 3.5%, then that could be problematic for asset prices. Also, last month, last week rather, I realized the one-month Treasury went up like 60-basis points just out of nowhere and then quickly came down.  And in the past, when I’ve seen those kinds of glitches it kind of tells me that yields are going much higher. Also following that glitch, we saw Lorie Logan from the Dallas Fed talk about how, “yeah, you know, we’re thinking about starting to slow down our balance sheet runoff.” So, I’m following those things as well.

Joe Burke

OK, thank you.

Andrew Wilkinson

Did that really happen? It wasn’t just a pricing glitch on the screens?

Joe Burke

I mean, there was a lot of year end pressure that quickly, you know, went away.  But, um, because the turn like for example, the term was trading from Dec 29 to Jan 2 at like 5.80-5.90% and then ended up coming up coming down at like 5% towards the end of the day. So, I mean the starch came out of that that trade pretty quickly.

Andrew Wilkinson

Right.

Jose Torres

Yet to be precise, yield of 6.12% on the one-month.

Steve Sosnick

Which day was that?

Jose Torres

That was last week. I’ll get back to you exactly on the day.

Steve Sosnick

No, no, that’s OK. No, I just wanted to see if that was before the end of the year or after?  So, it was last week?  Because that’s the kind of stuff you expect to happen into year-end and we get some weirdness. That’s odd that it happened after the calendar turned.

Joe Burke

Yeah, I’ll take a look and see what I can find. I don’t recall seeing that, so I completely missed that.

Andrew Wilkinson

You’re probably not using Interactive Brokers data. That’s the problem. [chuckles]

Jose Torres

I noticed that on my side.  And then on Twitter, some of the bears noticed it.  You know, Twitter is market bear land, so I got excited there. They were all talking about it like, “Oh, are you sure it’s a glitch or something else is gonna happen?”  So, I’ll tell you guys what state it was later in e-mail when I find out exactly.

Andrew Wilkinson

Thanks everybody for joining us. Look out for more podcasts at ibkrpodcasts.com. And don’t forget to leave us a rating wherever you download your podcasts from.

One thought on “Which Employment Statistics Should We Believe?”

  1. I have not tracked this for years as you have. The Labor Department is reporting employment numbers that are high and then revising them down. Is that new or has it occurred in the past as consistently as it has lately?

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