Month: July 2023

Payrolls Data Showing Solid Wage Growth Keeps Fed on Track to Hike Rates

• Payrolls climbed by 209,000 in June, below economists’ forecasts but still rising at a healthy clip. The unemployment rate fell to 3.6%. Average hourly earnings rose 4.4% on a year-over-year basis, up from a 4.3% pace in May.
• The relatively strong job gains, coupled with the re-acceleration of wages and the drop in unemployment cements the case for a Fed hike this month and will add to the conversation about more tightening being needed later this year. This is a labor market that’s still very tight.
• Most industries added jobs, with health care and government driving gains. The leisure and hospitality industry added a meager 21,000 jobs, while construction employment rose by 23,000.
• Services accounted for more than half of new hiring in June with 120,000 new jobs. Manufacturing added about 7,000 new jobs. Government jobs made up more than a quarter of new hiring in June, up from 18% between January and May.

Last week, I wondered how long can the manufacturing recession last before it begins to also meaningfully impact services, noting that, in 2007-08, aggregate hours worked in manufacturing declined 3.6% before services peaked.

June data and revisions to previous months show that manufacturing hours worked have stabilized since April and are down only 1.0% since their January peak.

Aggregate Hours Worked, Manufacturing & Services

The chart below covers the 15 months of Fed tightening. The monthly growth in goods-producing jobs (black), which include construction and manufacturing, dropped from +68k on average during the first 5 months on the chart to +15k during the last 5. During the 5 months prior to each of the last 3 recessions, including the mild 1990 recession, goods-producing jobs declined an average of 50k per month before dragging service-producing jobs down.

The lags are still lagging. It’s getting very late for a second half recession, even for one in 1H’24.

Seeking to tame demand, 500bps of tightening have yet to show any meaningful effect.

From the FOMC’s viewpoint, the June labor data were the strongest since January. Jobs growth slowed to 1.6% a.r. but hours worked rose and wages are not decelerating. In fact, Q2 wages rose at a 4.3% annualized rate, up from 3.9% in Q1.

Aggregate weekly payrolls (employment x hours x wages) rose 6.3% YoY in June, in line with the average of the previous 3 months. Real payroll income keeps rising given PCE inflation averaging 4.0% YoY in April and May.

On a MoM basis, aggregate payrolls jumped 0.8% in June after +0.3% in May and 0.5% in April. For Q2: +1.1% or 4.5% annualized, down from 1.6% or 6.5% annualized. Personal expenditures should grow similarly per the chart above.

Given headline inflation at +2.3% annualized in the last 3 months, thanks to surprisingly weak energy prices, real expenditures should keep growing, sustaining overall demand and core inflation.

Since March 2022, while the Fed funds rate skyrocketed 500bps, oil and natural gas prices cratered 35% and 48% respectively, freeing up a lot of discretionary income, unusually counteracting the Fed’s monetary policy.

For the FOMC, the unexpected result is that real consumer demand is sustained by rapidly slowing headline inflation, counteracting its very restrictive policy, and keeping the targeted core inflation rates much higher than what the normal playbook dictated.

While headline inflation is receding (+2.3% a.r. in the last 3 months), the Cleveland Fed’s Inflation Nowcasting model, through July 7, is forecasting core CPI up 0.42% (+5.1% a.r.) in July and core PCE up 0.36% (+4.4% a.r.), same pace as June’s.

The “good news” is that this unlucky (!) Fed, juggling with so many erratic balls, is not slowing demand enough to bring core inflation down to its target.

The “bad news” is that this totally focused Fed could well keep hiking until the bite is strong enough. Hopefully, it won’t get unlucky again and see those volatile energy prices “unexpectedly” spike back up…

And there’s this other known unknown explained by the Fed staff on June 23::

In Figure 2, we present our estimates for the accumulated stock of excess savings. Broadly speaking, advanced economies have followed a similar hump-shaped path so far, with a large increase in excess savings in 2020 and parts of 2021, followed by a decrease in the stock of excess savings which reflects a period of below-trend savings rates as households use their accumulated buffer to fuel consumption.

That said, we note that the United States’ path differs slightly from other countries, as its stock of excess savings increased more rapidly, peaking in 2021Q3, and then decreased more quickly.

As a result, its excess savings stock, at least computed according to our method, is currently completely depleted, which contrasts with other advanced economies where households still hold a buffer of excess savings of about 3 to 5 percent of GDP. Given the more rapid drawdown of excess savings, aggregate demand in the United States is likely to have been supported more than in other countries over the past year. (…)

Absent any further shocks to disposable income or savings behavior, our analysis suggests that the accumulated average AFE [Advanced Foreign Economies] excess savings should be unwound by the end of the year.

Also, this known known: Student loan cliff ahead

The Supreme Court’s decision to overturn the Biden plan on student loan forgiveness complicates an already tricky situation for the U.S. economy.

The coming student loan cliff is the latest in a string of withdrawals of pandemic-era supports. These include the end of both stimulus checks and child care tax credits, as well as the pullback on SNAP benefits and Medicaid supports.

Overall, the resumption of student loan payments will pull $70 billion a year out of the economy, according to an estimate from Moody’s Analytics. The spending reduction will be about 0.4%, Moody’s estimates. (Axios)

Canada: Job Growth Remains Firm

• Employment increased by 60k in June, above expectations (+21k) and largely driven by job gains in the services-producing sector.
• Employment increased by 50k in the services-producing sector and by 10k in the goods-producing sector.
• The unemployment rate ticked up to 5.4%, above consensus expectations.
• Year-over-year wage growth ticked down 1.2pp to +3.9% in June and sequential wage growth was also soft. Three-month annualized wage growth declined to +2.4% (+3.4% in May) and MoM wage growth was essentially flat.
• GS:

The improved data raises some risk of a hold at this week’s July meeting, but we expect the BoC will deliver another 25bp hike. The accumulated evidence from 2023H1 suggests that activity remains too firm, progress on the BoC’s preferred sequential core inflation measures has stalled out, and the continued rebound in house prices raises the risk of a pickup in shelter inflation. We therefore expect that the BoC will decide further tightening is necessary.

Beyond July, we expect that the BoC will follow a meeting-by-meeting approach to policy and maintain our forecast that the cycle will end this week with a 5% terminal rate. However, we see policy risks as skewed toward further tightening. Despite having made more inflation progress than other DMs, the BoC seems relatively more determined to return inflation to 2%. Firmer than expected activity or inflation data—particularly if the shelter inflation outlook continues to worsen or the disinflationary core goods impulse fades sooner than expected—could therefore easily push the BoC to hike again before end-2023.

Progress on the BoC’s Preferred Sequential Core Measures Has Stalled Since the End of Last Year

China on brink of consumer deflation Latest signs of economic weakness likely to spur calls for government stimulus measures

• Deflation Looms in China as Rebound Loses Steam China’s consumer inflation flatlined in June after two months of meager growth, while factory-gate prices fell at their fastest pace in more than seven years.

(…) Consumer prices didn’t budge in June from a year earlier, after growing 0.2% in May and 0.1% in April. The reading is the weakest since February 2021 and undershot a 0.2% increase anticipated by economists surveyed by The Wall Street Journal.

Stripping out the more volatile food and energy prices, core inflation in China decelerated from 0.6% in May to 0.4% in June, reflecting sluggish demand for goods and services.

China’s producer prices index, a gauge of prices charged by manufacturers, fell 5.4% from a year earlier in June, the weakest reading since December 2015 and marks the ninth straight month of year-over-year declines. (…)

In truth, China’s headline CPI stalled from a high base last year. On a MoM basis, total CPI rose 1.4% annualized in June after +2.6% in May.

But China continues to suffer from stalled goods consumption in the U.S.. Per Goldman numbers, core goods inflation was -0.8% YoY in June after -0.2% in May. Inflation in services fell to +0.7% YoY in June after +0.9% in May. On a MoM basis, services CPI inflation edged up from 0.1% a.r. in May to 0.3% in June.

China’s shipments to the U.S. dropped 8.5% YoY in the first five months of 2023, down 12.2% in May (-18% in USD terms).

Axios says that “Both as a percentage of total imports and as a percentage of GDP, Chinese imports are now at the lowest they’ve been in 20 years.

• Mind The Gap! Shein’s tariff arbitrage (Axios)

Not all Chinese imports get registered as imports. Specifically, if a shipment falls beneath a certain “de minimis” value, it neither gets inspected nor taxed by U.S. Customs. That de minimis value is $800 — high enough to cover effectively all of the shipments from Chinese fast-fashion giants Shein and Temu.

“The de minimis provision is foundational to Shein and Temu’s business models,” finds a House of Representatives report into the companies. Shein and Temu between them ship about 600,000 packages per day to the U.S. under the de minimis exception.

The Gap, a company that sources clothing in China and ships it in bulk, paid about $700 million in import duties in 2022. Shein and Temu, by contrast, paid nothing.

If Shein does decide to go public in the U.S., possible changes to the de minimis rule will be very high up on its list of risk factors.

Meanwhile, compounding the problem(s), the Chinese real estate dominos are finally crumbling as ADG explains:

(…) June residential property sales tumbled by 18% sequentially and 42% from their year-ago levels, according to estimates from Raymond Cheng, managing director of CGS-CIMB Securities in Hong Kong. “The numbers are really bad,” Cheng told the South China Morning Post, noting that June typically represents one of the busier months of the year.  Nationwide transactions will decline 5% across the full year per guesstimates from S&P Global, following the 28% drop logged in 2022.

Bourgeoning inventories complement that slowdown, as home listings across 13 major cities expanded by 25% over the first five months of the year, according to E-house China Research and Development Institutions, with supply in Shanghai and Wuhan vaulting by 82% and 72%, respectively. “The real situation is a bit worse than what was expected,” China Vanke, the Middle Kingdom’s second largest property firm by sales, warned at a shareholder meeting Friday.

A busted land auction in China’s tech hub underscores the grim backdrop for real estate developers.  Shimao Group Holdings came up empty in efforts to find a buyer for a $1.8 billion Shenzhen, Guangdong Province project today, despite offering the portfolio at a 20% discount to its appraised value, Bloomberg reports, citing data from JD.com. Shimao, which defaulted on $1 billion worth of dollar bonds last year, shelled out $3.3 billion for the gargantuan lot back in 2017, initially planning to erect a 500-meter skyscraper before the project went pear shaped. (…)

As the property market remains in the dumps, financial breathing room is in short supply. Thus, off-balance sheet borrowings among the LGFV [local government financing vehicles] category topped $9 trillion as of Dec. 31, estimates the International Monetary Fund, up 65% from three years earlier and equivalent to more than half the nation’s nominal GDP for 2022.  For context, total U.S. state and local government debt stands at about $3.2 trillion. Meanwhile, cash positions among a sample of 2,892 LGFVs collected by the Rhodium Group last month collectively fell 10.3% on an annual basis, marking the first such decline in five years.

State owned banks are turning to a time-worn remedy in response. Bloomberg relays that lenders such as China Construction Bank and Industrial & Commercial Bank of China are increasingly opting to amend and extend (or is that extend and pretend?), offering financing to “qualified” LGFV’s with 25-year maturity schedules, rather than the decade long borrowing terms typically extended to high quality corporate borrowers.  What’s more, some of those loans include waivers on interest or principal repayments during the first four years, reportedly reflecting lenders’ confidence “that local authorities will not let any of [the LGFV’s] fail.”

The 25% jump in listings suggests that many Chinese owners are moving off the sidelines and capitulating. That could be ugly.

EARNINGS WATCH

The Q2 earnings season starts this week but we already got 18 early reporters in with a beat rate of 78% and a surprise factor of +5.5%, even though their earnings dropped 21.4% YoY on flat revenues.

Corporate America must also be positively impacted by lower energy costs. In Q2, average WTI and natural gas prices are down 32% and 71% YoY respectively.

Q2 earnings are seen down 6.4%, slightly worse than on July 1.

Earnings pre-announcements have ben much better than at the same time after Q1:

Trailing EPS are now $215.07. Full year 2023: $219.14e. 12-m forward: $230.26. Full year 2024: $244.88.

The Rule of 20 P/E is behaving like in 2001 when the R20 P/E uncharacteristically did not fall back to the “20” fair value area but bounced back up. That was not because of a rising market, rather earnings falling faster than equities, right in the recession and an aggressively easing Fed.

The conventional P/E ratio is 19.1x forward EPS. We’ve been there before but not very often…

• NDR: “Additional rate hikes would reemphasize a challenge the market has not faced since before the financial crisis: cash is a reasonable alternative to equities. The S&P 500 GAAP earnings yield is below the T-bill yield for the first time since 2001 (chart, left). Earnings growth may need to accelerate more than analysts are suggesting for investors to justify reallocating into equities.”

Stock Market Short Sellers That Helped Fuel This Year’s Rally Are Finally Giving Up

(…) Shifting sentiment can be seen in data showing bearish positions in exchange-traded funds slipped to three-year lows while shorts in S&P 500 futures were unwound at the fastest pace since 2020. Meanwhile, the population of optimists is exploding, with bullish newsletter writers in Investors Intelligence survey outstripping bearish ones by 3-to-1, the highest level since late 2022. (…)

Large speculators, mostly hedge funds that saw their net short positions in S&P 500 swell to a record at the end of May, were busy unwinding bets in the following four weeks. Their bearish holdings fell by 226,000 contracts over the stretch, the largest drop since mid-2020, according to data from the Commodity Futures Trading Commission compiled by Bloomberg.

Among newsletter writers tracked by Investors Intelligence, those classified as bullish rose to 54.9% while the proportion of bears fell to 18.3%. That’s in stark contrast from the end of last year, when bears exceeded bulls. (…)

Source: Yardeni Research

In ETFs, short interest is near a three-year low based on its percentage of market value, according to Markit data compiled by Morgan Stanley’s sales and trading team. Short interest in individual companies — while not dissipating completely — has sunk back toward median levels across most industries. (…)

• Retail Flows:

Source:  Daily Chartbook

• How much are you willing to pay for tech? Great chart via Soc Gen’s Edwards showing the latest tech PE expansion vs trailing EPS. AI is great, but what price are you willing to pay to own the hype? (The Market Ear)

Soc Gen

El Nino! Sea temp headed for record

Data: Climate Reanalyzer. (Average reflects 1982-2011 mean). Chart: Rahul Mukherjee and Simran Parwani/Axios

The globe set or tied four daily heat records last week (Monday-Thursday), and had six straight days (and counting!) with global average surface temperatures exceeding 17°C (62.6°F). That hasn’t happened since such data began in 1940 — and likely not for many centuries before that, Axios’ Andrew Freedman reports.

The seas take in about 90% of the excess heat trapped by greenhouse gasses. So global water temperatures are also hitting all-time milestones. A strengthening El Niño in the Pacific Ocean is adding extra heat — and is likely to yield a record warmest year in 2023 and 2024.

The U.S. this week will endure an intensifying, long-duration heat wave extending from Arizona and New Mexico to southwestern Texas. A heat wave will also keep going in Florida. Numerous daily — plus some monthly, and even all-time records — may be broken.

Payroll employment increases by 209,000 in June; unemployment rate changes little at 3.6%

(…) Nonfarm employment has grown by an average of 278,000 per month over the first 6 months of 2023, lower than the average of 399,000 per month in 2022. (…)

The change in total nonfarm payroll employment for April was revised down by 77,000, from +294,000 to +217,000, and the change for May was revised down by 33,000, from +339,000 to +306,000. With these revisions, employment in April and May combined is 110,000 lower than previously reported.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 12 cents, or 0.4 percent, to $33.58. Over the past 12 months, average hourly earnings have increased by 4.4 percent. In June, average hourly earnings of private-sector production and nonsupervisory employees rose by 11 cents, or 0.4 percent, to $28.83.

The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.4 hours in June. In manufacturing, the average workweek was unchanged at 40.1 hours, and overtime was unchanged at 3.0 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls remained at 33.8 hours.

@LizAnnSonders

SERVICES PMIs

USA:

• S&P Global’s: Robust services growth accompanied by reignition of cost pressures in June

At 54.4 in June, the seasonally adjusted final S&P Global US Services PMI Business Activity Index fell slightly from 54.9 in May. Nonetheless, the latest data indicated a solid rise in business activity that was the second-fastest in just over a year. Companies noted that strong client demand and a sustained uptick in new business supported the latest expansion.

New orders at service providers increased for the fourth successive month in June. The rate of growth eased fractionally from May’s 13-month high, but remained sharp overall. New customer wins and continued interest from existing clients were reportedly maintained by successful marketing strategies, helping to boost new sales, according to panellists.

At the same time, external demand improved for a second month running. Firms noted that a rise in new business from abroad was linked to the acquisition of new customers and a greater interest in international travel. New export orders grew at a solid pace, though the rate of increase slowed from that seen in May.

On the price front, service sector firms saw a marked rise in cost burdens at the end of the second quarter. The increase in business expenses was reportedly driven by greater wage bills, with some companies also noting upticks in supplier prices and higher borrowing costs. The pace of cost inflation reaccelerated and was the sharpest since January.

Despite faster cost inflation, service providers registered a slower increase in selling prices in June. The rate of charge inflation eased further from April’s eight-month high to the weakest since February. Efforts to remain competitive reportedly limited pricing power, despite several firms reporting the continued pass-through of greater costs to clients.

A further expansion in new business led firms to raise employment. Job creation has been seen in each month since July 2020, with June’s modest pace of increase again little-changed since March. Nonetheless, strain on capacity was reflected in a renewed accumulation of backlogs of work in June. Although only marginal, service providers noted pressure on staffing resources to fulfil incoming new business.

Sentiment was buoyed by accommodating demand conditions, with output expectations for the year ahead strengthening. The degree of confidence was the highest for just over a year amid hopes that investment in new service lines, marketing spending and softer inflation will support growth.

The S&P Global US Composite PMI Output Index posted 53.2 in June, down from 54.3 in May, to signal a solid but slower Composite Output Index Gross Domestic Product (GDP) upturn in business activity.

Similarly, total new orders rose at a solid pace, albeit slower than in May. The decline in manufacturing new sales accelerated and offset to some degree the services expansion. Meanwhile, new export orders fell further. Total new business from abroad contracted for the thirteenth month running. Cost pressures picked up, as a second successive fall in cost burdens at manufacturers was offset by the steepest rise in service sector costs recorded since January. Output charges continued to rise at a strong rate that was well above the pre-pandemic average. This was despite broadly unchanged selling prices in the goods-producing sector. Output charges were buoyed by rising prices in the service sector, though the overall increase was the slowest since January. Efforts to fill long-held vacancies, alongside service sector efforts to work through backlogs, led to a further moderate increase in employment.

• The ISM:

In June, the Services PMI^® registered 53.9 percent, 3.6 percentage points higher than May’s reading of 50.3 percent. (…) The Business Activity Index registered 59.2 percent, a 7.7-percentage point increase compared to the reading of 51.5 percent in May.

The New Orders Index expanded in June for the sixth consecutive month after contracting in December for the first time since May 2020; the figure of 55.5 percent is 2.6 percentage points higher than the May reading of 52.9 percent. (…)

Fifteen industries reported growth in June. (…)

That’s vs 11 in May.

May’s decline in the ISM Services has been reversed and more, as expected from S&P Global’s Services PMI.

Both surveys are now in sync on growth and new orders on the important service sector. Wages are still pushing up.

The Fed’s job’s not done.

Eurozone economy stalls in June as services growth wanes and factory production falls

The seasonally adjusted HCOB Eurozone Composite PMI® Output Index signalled a stalling of the eurozone economy in June, registering just a fraction below the 50.0 no-change mark at 49.9. This was down from 52.8 in May, and a considerable loss of momentum from April’s 11-month high of 54.1. The latest survey data continued to portray significant differences in performance by sector as a deepening downturn in factory output compared with sustained, albeit softer, expansion in services activity.

The latest survey data revealed that the direction of travel was broadly downwards for the five monitored euro area nations, with the Composite PMI Output Index falling for Spain, Ireland, Germany, Italy and France. Notably, the latter two both saw private sector business activity fall for the first time in six and five months respectively. Growth was sustained in the largest eurozone country, Germany, but slowed markedly since May to just a marginal pace. Spain was the strongest performer, as has been the case since February.

Economic activity was restrained in June by declining intakes of new business. According to the latest survey data, new orders fell modestly and for the first time since January. Manufacturing demand conditions were considerably weak, with the sales of eurozone goods falling at the quickest pace in eight months. Demand for services increased, but the rate of growth slowed for a second month in succession to a five-month low.

There was an increased drag on sales from non-domestic clients, as evidenced by a sharper decrease in new orders from external clients. The drop in new export business was broad-based, although manufacturers recorded a much steeper decline than services firms. (…)

Price pressures across the eurozone continued to soften at the end of the second quarter. Notably, the overall rate of input cost inflation fell to a two-and-a-half-year low and was below its long-run average. The manufacturing sector was a considerable driver behind this, with their input prices falling at the most rapid pace since July 2009. Services expenses rose sharply, but at the slowest pace in just over two years.

Euro area businesses continued to raise their charges in June, albeit to the weakest extent since March 2021. Discounting accelerated at manufacturers amid falling costs and intensifying competition. By contrast, services charges rose at strong rate, although output price inflation here slid to a 20-month low.

The HCOB Eurozone Services PMI Business Activity Index fell for a second month running in June to 52.0, from 55.1 in May. Although signalling sustained growth, the upturn was only modest and the weakest since January.

There was a slowdown in new business growth at the end of the second quarter. Having hit a one-year high only as recently as April, the increase in new workloads eased to a marginal pace in June that was the softest in five months. Dragging on demand was a renewed, albeit fractional, deterioration in sales performances to non-domestic customers. The respective seasonally adjusted index had reached its second- and third-highest levels in the series history in the two prior months.

Volumes of incomplete business broadly stabilised in June following four consecutive monthly increases. Eurozone service providers continued to recruit additional workers, with the rate of job creation remaining strong despite easing to a three-month low.

The latest survey data pointed to a cooling of price pressures across the eurozone services sector. The overall rate of input cost inflation remained sharp in June but fell to a 25-month low. Firms were less aggressive in their price setting behaviour as a result, with output charges rising at the slowest pace since October 2021.

Lastly, businesses’ growth expectations for the coming 12 months weakened at the end of the second quarter. Although firms remained optimistic overall, the level of positive sentiment slid to the lowest in the year to date.

U.S. Oil Boom Blunts OPEC’s Pricing Power U.S. petroleum production is on pace for a record-breaking year, helping to keep energy prices stable despite the efforts of Saudi Arabia and other major oil exporters to drive them higher.

U.S. crude output this year through April is up 9% from a year ago, surprising analysts given that oil futures were sliding and the country’s shale boom was showing signs of peaking. The surge is being driven in part by improved production efficiency, and signals that the Organization of the Petroleum Exporting Countries’ power to control prices could be waning as output continues to grow in the rest of the world.

After prices crashed in 2015, U.S. producers “went back to the lab and got much more efficient, with a lot of engineering-based gains and a lot of staff and cost cutting,” said Vikas Dwivedi, global oil and gas strategist at Macquarie Group.

OPEC and its allies so far this year have announced cuts amounting to about 6% of last year’s production. Crude prices have nevertheless slid by about 13%. Along with weaker-than-expected demand in China, prices are being weighed down by stepped-up production in other countries including Brazil, Canada and Norway. Increased output in countries outside OPEC is making up for about two-thirds of the alliance’s cuts, according to estimates by Rystad Energy.

Half of that new crude is coming from the U.S., where major producers including ConocoPhillips, Devon Energy, Pioneer Energy and EOG delivered strong production in the first quarter. Smaller private companies are reaping the rewards of a drilling surge they made last year when oil prices were higher. 

Companies’ efforts to improve efficiency are also giving them more leeway to remain profitable even when oil prices are slipping. Production improvements since 2014 have pushed down the cost of drilling and fracking in the U.S. shale patch by 36%, according to J.P. Morgan, even as recovered oil volumes have increased. (…)

The increased efficiency means EOG can earn as much from oil priced at $42 a barrel today as it would have from oil trading at $86 nine years ago. People familiar with Saudi oil policy have said the government’s budget requires an estimated $81 a barrel. (…)]

Exxon-Mobil and Chevron are both working to significantly boost their output in the next few years from the Permian Basin—a key oil-producing region that spans parts of West Texas and southeastern New Mexico. The industry still only recovers about 10% of the oil it theoretically could, Exxon-Mobil Chief Executive Darren Woods said at a conference last month.

Woods has challenged his engineers to double that rate. (…)

Treasury Rout Sends Global Yields to 15-Year High on Strong US Job Market

• 1-Year Treasury yield is currently at 5.40%, a level not seen since December 2000 (@Barchart)



• Bond Markets Want to Break Free Two-year yields last hit these levels in 2007, but accidents don’t happen the same way twice. Still, the Fed will be more pressured force a hard landing.

(…) Since the 21st century officially started at the beginning of 2001, this was only the 65th day when the two-year yield had traded above 5%. This is unusual; it means that a spike earlier this year can’t be taken as the high for the cycle, and it can’t be ignored:

(…) The trigger for Treasury yields’ spike to levels last seen in 2007 came from the far-stronger-than-expected ADP data on private sector employment sparked bets anew that the Federal Reserve may not slow its monetary tightening pace as inflation proves more persistent. It came in at almost double expectations, suggesting an extra half-million jobs were created last month (…).

If the ADP number is anything like accurate, then, that implies that a lot of economists have this very wrong. (

The latest data on claims for jobless insurance suggested no increase in layoffs; initial claims did tick up a little, but this was balanced by continuing claims. On this measure, it’s impossible to say that the labor market has eased meaningfully enough to help vanquish inflation.

There was also the customary jolt from the JOLTS (Job Openings and Labor Turnover Survey). It showed a reduction in vacancies, which suggests less pressure on employers to offer higher wages to attract workers. However, that decline is nowhere near as fast as might have been hoped, and means that there are still more than 1.5 job openings for every unemployed person.

(…) the US economic surprise index kept by Citi, which tracks how much incoming data is exceeding or lagging expectations, has jumped to its highest in more than two years (…)

Note that serious Fed tightening started in mid-2022. Since then, it’s been surprise after surprise. Must be the lags…or a wrong playbook…

The BLS Job Openings are on track with Indeed’s Job postings, down some more through June 30 but still 25% above pre-pandemic levels:

Lagarde Says ECB Won’t Stand Idly By If Margins and Wages Rise

FYI:

Norway’s EV boom blazed a trail that may be followed by the rest of the world — but it also shows how hard it is to quit oil.

• Government incentives costing about $1.8 billion annually in lost revenue propelled a jump in new EVs from 3% of total sales in 2012 to almost 80% in 2022, a local association said.
• Gasoline use fell by 37% since 2013, Eurostat data show, but demand for diesel remains strong and has yet to show a consistent downtrend.
• Still, it’s a “dramatic change for oil’s position in the whole energy system,” as renewables rise in the energy mix.