U.S. Jobs Market Remains Robust The U.S. economy added 372,000 jobs in June, extending a streak of strong gains despite signs of slowing economic growth. The jobless rate remained at 3.6%.
(…) Hiring gains last month held near the previous three months, when companies added an average of nearly 400,000 workers, but slipped from higher totals early in the year. (…)
Average hourly earnings grew 5.1% in June from a year earlier, a step down from earlier levels. (…)
Employers hired across industries, with the government the only major category to shed jobs in June. Hiring continued in industries vulnerable to interest-rate increases and shifting consumer habits. For instance, construction firms, susceptible to a faltering housing market and higher mortgage rates, added jobs last month. Transportation and warehousing companies hired workers despite a spring pullback of consumer spending on goods. (…)
The number of people in the labor force fell by 353,000 in June. The labor-force participation rate—or the share of adults working or seeking a job—ticked down to 62.2% in June from 62.3% a month earlier. Participation dropped broadly last month, with declines among women, men, workers in their prime ages of 25 to 54 and baby boomers. (…)
Goldman Sachs wrote that “today’s report indicates an overheated labor market that is only beginning to slow.”
But smoothing out the monthly noise:
- 2021 average: 562k;
- last 12-month average: 524k;
- last 6-month average: 457k;
- last 3-month average: 375k.
Add the continuous decline in average weekly hours, back into the 2012-19 range and in weekly manufacturing overtime at the low end of its range…
…plus the stalling of temp employment which rose only 13.5k in Q2 following +181.6k in Q4’21 and +80.3k in Q1’22…
…and you get a labor market that may be short of workers but is getting shorter and shorter of actual work.
Amid slowing demand, employers have first cut temps, overtime and the workweek, trying to retain scarce employees. If demand does not pick up, they will be faced with accepting lower margins or laying people off. Some seem to have made that decision already:
U.S.-based employers announced 32,517 cuts in June, a 58.8% increase from the 20,476 cuts announced in the same month last year. It is 57% higher than the 20,712 cuts announced in May, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc.
(The Daily Shot)
“Employers are beginning to respond to financial pressures and slowing demand by cutting costs. While the labor market is still tight, that tightness may begin to ease in the next few months,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.. (…)
Of the thirty industries Challenger tracks, ten have announced more cuts in 2022 than in the same period last year.
“Many of the sectors increasing layoffs this year are currently dealing with the housing market downturn, as demand for mortgages dries up and financing becomes more difficult and expensive to obtain,” Challenger said.
“Technology companies are also cutting workforces as inflation and recession concerns deepen. Some firms are offering voluntary severance or, as is the case with companies like Meta and Tesla, creating environments where workers may want to quit,” he added.
If you wonder how the 32k June cut announcements compare with pre-pandemic world, the 2019 monthly average was 49k (42k in Q4’19).
Aggregate weekly payrolls (employment x hours x wages) are up 9.3% YoY in June, unchanged from May and still above inflation.
Sequentially, however, the slowdown that started in March continues. Last 4 months: total payrolls are up +6.3% annualized: employment +4.0% a.r., hours -2.3% a.r. and wages +6.1% a.r..
Growth in total hourly earnings (blue below) has been slowing, averaging +6.0% a.r. since March but only 4.1% in the last 2 months and +3.7% in June. However, hourly earnings for production and non-supervisory employees have been accelerating, +5.5% a.r. in the last 4 months and +6.0% a.r. in the last 2 months.
But it is interesting to analyse the wage dynamics among various industries (numbers in brackets = % of total employment, rounded):
All Employees Prod/Nonsupervisory
YoY Last 2 ms a.r. YoY Last 2 ms a.r.
Total Private (86%) 5.1% 4.1% 6.4% 6.0%
Goods Producing (14%) 4.7 4.1 5.6 7.2
Private Services (72%) 5.2 4.2 6.5 5.5
Trade, Transport, Utes (19%) 4.9 2.8 6.9 4.3
Transport, warehousing (4%) 5.3 0.6 10.6 5.8
Information (2%) 4.4 10.3 0.9 8.9
Financials (6%) 2.4 0.4 6.4 9.6
Professional & bus. serv. (15%) 5.8 1.4 7.0 5.0
Education, Health serv. (16%) 6.1 6.5 6.7 4.8
Leisure & Hospitality (11%) 9.1 10.3 10.1 6.8
From this admittedly somewhat limited data:
- there is a slowdown in wage growth, overall.
- 40% of “all employees” wages are growing less than 3.5% in the last 2 months, all in services, so 55% of services wage growth is below 3.5%. Goldman Sachs estimates that wages growing 3.5% is compatible with 2% inflation.
- 7 of the 10 listings above are lower in the last 2 months than YoY for both categories of employees.
- Services wages are not accelerating nor rising faster than the total.
- “Hot” sectors such as Transport, warehousing, Educ/Health and Leisure & Health (31% of total employees) are all seeing slower “rank and file” wage growth, from +9.1% YoY to +5.8% a.r. in the last 2 months, on average.
It thus seems that the slowing economy is actually trickling down to the labor market, although stealthily (temps, overtime, hours). We may be seeing the first tangible signs of slowing wage gains.
PEAKFLATION?
Inflation is clearly impacting consumer spending. Real disposable income was down 7.8% annualized in Q1. It was barely up sequentially in April/May (+1.0% a.r.) but it’s down 3.3% YoY.
Real expenditures on goods are down 7.3% annualized since February. Real services were up 3.0% annualized in Q1 and 3.4% a.r. in April/May, just enough to keep total spending growth positive, up 0.6% annualized since February.
The goods sector will undoubtedly deflate during the next several months as satiated demand meets overstocked retailers and clearing supply channels. Commodity prices are easing, including oil, with crude down 15-20% and gasoline off 7% since early June.
The Chase consumer spending tracker remains weak through July 2nd, showing particularly large declines in discretionary categories. J.P. Morgan estimates that control sales were down 3.4% in June, in nominal dollars.
Services inflation should also abate with lower energy prices and seemingly contained wage pressures. The latest PMIs revealed that new orders for services declined last month for the first time in two years and that service providers are now discounting:
the rate of inflation slowed sharply for the second month running and was the softest since last September. Some panellists reported trying to price competitively to attempt to stimulate new business in a weakening demand environment.
Overall, prices remain elevated, squeezing consumers, but there seems to be some relief coming at the margin. There is a potential surprise in summer, if not in the June CPI (July 13), more likely in its mid-August release.
Yet, the main narrative has not changed:
- “US Jobs Signal Another Big Fed Hike” (Bloomberg)
- “A better-than-expected U.S. jobs report eased some worries about an imminent recession but also bolstered the case for the Federal Reserve to continue aggressively hiking rates, threatening more turbulence for asset prices this year.” (Reuters)
- “The June employment report “just reaffirms that the economy is strong, and there is still a lot of momentum in the labor market,” said Atlanta Fed President Raphael Bostic in a CNBC interview Friday. He said the Fed could raise rates by 0.75-point at its next meeting “and not see a lot of protracted damage to the broader economy.”” (WSJ)
The risk is that this Fed, now totally focused on inflation and preserving credibility, again misreads the trends and is too aggressive to the point of strangling the economy when the economy is already being strangled by inflation (and/or another pandemic bout).
David Rosenberg remembers 2008:
Back in the summer of 2008, everyone thought we were in a “soft landing” even though the recession was more than two quarters old; and everyone believed the Bear Stearns fiasco was a one-off event and yesterday’s story.
Back in the summer of 2008, oil prices approached $150 per barrel and headline inflation came close to touching the +6% mark. Okay — not +8.6% like today, but we didn’t have a global pandemic, Chinese lockdowns, and a Russia-waged war back then, either. Nope. We had voracious appetite for commodities coming out of China that fueled an inflation pick-up of significance. Which hardly lasted.
What happened was that the ensuing commodity bear market resulted in the CPI goods inflation rate going from +7.8% in July 2008 to -5.9% a year later. Services or rents didn’t have to deflate, though they did slow. The bottom line is that the reversal in oil and base metals was so large that the goods deflation took the overall YoY CPI trend to -2.1% from +5.6%.
In my June 21 post Desperately Seeking The Low, I concluded
Inflation is the most crucial factor to watch in the second half of 2022. Falling inflation would support valuation and potentially offset a mild decline in profits. More importantly, a sustained easing in inflation trends would likely appease the hawks in the FOMC and incite the Fed to turn dovish sooner than later.
Since 1957, equities performed well after 11 of 13 Fed easing episodes. The R20 P/E was above its 20 fair value in 4 of those episodes.
Goldman Sachs illustrates how equities behaved after inflation peaked since 1955:
S&P 500 total return around inflation peaks. Data since 1955
Source: Datastream, Goldman Sachs Global Investment Research
The recession call remains paramount, hence the critical reading by this “data-dependent” Fed, often leaving it behind the curve. Too much aggressiveness, too long, could push the economy in a non-necessary recession.
Marlin_Capital
Fiera Capital’s strategists have just made the recession call, upping the probability of a recession to 80% from 35% last month, with the risk of a “deep recession” pegged at 50% (shallow recession at 20%).
In our high probability scenario, stubbornly elevated inflation that shows little sign of abating triggers an overly-aggressive monetary tightening event that sparks a recession. The depth and duration of the recession hinges on how persistent inflation proves to be, and on how much pain policymakers are willing to inflict on the economy in order to bring inflation down to levels deemed acceptable. In this calamitous scenario, central banks look to restore their inflation-control credibility after waiting too long to address mounting price pressures and tighten monetary policy too far, too fast – regardless of the economic fallout.
The Federal Reserve has prioritized tackling inflation at all costs, and will not come to the rescue of the economy should inflation expectations spiral higher. As such, policymakers are unlikely to pause the rate hike cycle until they see convincing evidence that inflation is coming down, which ultimately means that the Federal Reserve will be hiking interest rates well into economic weakness, making way for a “Deep Recession.”
Fiera’s third scenario, stagflation, moving from a 55% probability to 20%:
This scenario assumes that supply-demand imbalances resolve themselves faster than expected and inflation peaks in the near-term as the rotation in demand from goods towards services curtails pricing pressures, while a recovery in labor force participation and an influx of low-skilled labor constrains wage gains. This paves the way for the Federal Reserve to pause its tightening campaign and ultimately allows the U.S. economy to escape recession.
Callum Thomas at Topdown Charts illustrates some negative trends:
(…) from a quick glance at the movement of the stockmarket relative to the path of the PMI, you could argue that the S&P500 is already pricing in the risk of a recession to a certain degree…
Even if we take this assessment or interpretation at face value, the picture is kind of incomplete. And even if the conclusion is true, the case for optimism may be false.
The optimistic case would be something like “good, recession is already priced in, therefore a bottom is close“ …in other words, because the risk of a recession is already a fairly consensus idea, it is already in the price, and therefore that’s the extent of it, or put simply: sell the rumor, buy the fact.
This does leave out a bunch of other considerations like starting point valuations, and questions around how much the movement in stocks reflects the spike in bond yields, inflation surge, and geopolitical shocks, etc, vs say the likely path of earnings in a recession as such.
But the most important omission is that it does not address the magnitude or duration of recession. In other words, all we can say is that the stock market is behaving like the ISM is going to dip down below 50, and that’s all.
So the pessimistic/bearish take would be that the ISM is a (downwards) moving target. And the chart below is one of a few examples of leading indicators that point to a steeper drop than priced (and that still leaves the question of duration open).
All that said, it is true that when you have a situation where the market is ostensibly pricing in recession, and sentiment/positioning are significantly bearish, it doesn’t take much in the way of good news (or simply less-bad news) to trigger a potentially sharp rally.
All of which is to say, basically — big picture: risk of further downside (it’s a bear market after all), small picture: risk of upside (even the biggest baddest bear markets saw some major counter-trend rallies).
Callum simply mentions sentiment and valuation as other important considerations. Goldman Sachs aggregates several sentiment indicators in this chart. I added the red line:
Most positioning and sentiment indicators have turned more bearish YTD
Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research
As to valuation, some may be willing to hang their hat on the current 16.1x forward EPS $240.83, 10.5% above trailing EPS ($218.01) and currently full of doubters given the economic environment.
The Rule of 20 P/E, using actual trailing EPS and inflation, is 20% above fair value. Earnings and inflation could move meaningfully in the next few months. For example, if we “normalize” inflation to 3%, fair value rises to 3700. Adding estimated EPS after Q2= 3900; after Q3e: 3860.
But maybe we cannot have peakflation without a recession. In Fiera Capital’s deep recession scenario, EPS sink to $175 (shallow recession: $225). A generation of investors could not imagine equities going down. They also never experienced a 20% drop in index earnings…
FYI: S&P 500 Large Cap Index – 13/34–Week EMA Trend
Freight Rates Are Starting to Fall as Shipping Demand Wavers High-price freight contracts that were written when carrier capacity was tight and a rush to restock inventories was in full force are losing their shine as slowing demand and a wavering U.S. economy send shipping rates sliding.
(…) Xi’an, home to more than 13 million people and the famed Terracotta Warriors, and Wuxi, a manufacturing hub in eastern China with a population of 7.5 million, are both under city-wide restrictions. Xi’an started “seven days of control measures” — a new description for Covid restrictions now being used by officials — after a cluster there was found via genetic sequencing to be the BA.5 sub-variant, which may have higher immune escape than earlier omicron strains. (…)
Coming soon, the great tariffs rollback
(Bloomberg)
Canada’s economy lost 43,000 jobs in June, unemployment rate falls to 4.9%
Overall employment fell by 43,000 last month, unwinding the increase of 40,000 in May, Statistics Canada said on Friday. Financial analysts were expecting a gain of 22,500 positions. (…)
Average hourly wages rose 5.2 per cent in June from a year earlier, up from 3.9 per cent in May. This rise is consistent with other data that show wages are accelerating as employers struggle to find workers. Even so, wage growth isn’t close to matching inflation, thus eroding purchasing power. (…)
The total number of hours worked rose 1.3 per cent. Employment jumped by 33,000 in the goods-producing sector, with hefty gains in construction and manufacturing. And students were working at higher rates than in 2019, pointing to strength in the summer job market. (…)
China Inflation Rises on Gains in Food and Fuel Prices Inflation in China accelerated more than expected in June as prices for food and fuel picked up, but cost pressures remain muted compared with blistering gains in Europe and the U.S.
Consumer prices rose at a 2.5% annual pace in June, China’s National Bureau of Statistics said Saturday, picking up from a 2.1% increase recorded in May. Economists polled by The Wall Street Journal had expected year-over-year inflation of 2.4%.
Producer prices slowed for the eighth straight month, however, suggesting inflationary pressure in the wider economy is moderate. Prices charged by companies at the factory gate rose 6.1% from a year earlier, compared with a 6.4% reading in May, which was down sharply from the 13.5% pace recorded in October. (…)
The acceleration in June’s inflation number was driven by higher prices for gasoline and fuel as well as food, China’s statistics agency said. Prices for airfares and hotels also rose as spending picked up following the easing of Covid-19 restrictions. (…)
More, and more significant facts than what the WSJ offers:
- MoM, June CPI rose 6.7% annualized after -1.5% in May.
- Core CPI edged up to +1.0% YoY in June (+0.9% in May).
FYI: South Korea’s inflation was +6% YoY in June. The Philippines (+6.1%), Thailand (+7.7%)
The industry will sell 27 million cars this year, up 3% on 2021, the China Association of Automobile Manufacturers forecast, cutting its outlook from the 27.5 million sales and 5.4% growth it predicted in December. (…)
It now expects a 16% fall in sales of commercial vehicles to 4 million units.
Overall growth of around 3% compares with the 4.4% achieved in 2021 and the 1.9% fall of 2020. (…) Passenger car sales for the year would likely rise about 7%. (…)
Japan’s household spending posted a surprise drop in May, falling for the third consecutive month as the global chip shortage hurt car sales in a worrying sign for the outlook of the world’s third-largest economy.
Households are also facing pressure from the yen’s sharp decline that is pushing up prices of imported fuel and food at a time when consumer confidence still has to fully shake off the drag of the coronavirus pandemic.
Spending slipped 0.5% in May from a year earlier, government data showed on Friday, dragged down by lower expenditure on vegetables as well as cars, where supplies have been hit by chip shortages and supply chain disruption.
The data, which was much weaker than the median estimate for a 2.1% increase in a Reuters poll, showed people dialled back on spending on fish and vegetables to eat at home, while loosening their purse-strings on services such as eating out.
Spending also dropped from the previous month, falling 1.9%, weaker than a forecast 0.8% rise. (…)
Spending on eating out remained 17.3% below levels seen in May 2019 before the pandemic, the data showed.
EARNINGS WATCH
We have 18 early reporters in. Refinitiv says that 89% came with positive surprises (+4.1% on average) but Factset says 72% beat by 3.5%. Go figure!
Per Refinitiv, only the 6 Consumer Discretionary companies having reported showed a negative 2.3% earnings surprise. Combined earnings for these 18 companies are up 15.4% in Q2 on a 12% gain in revenues.
The earnings season gets underway this week (18 companies including 12 Financials).
Q2 earnings are expected to be up 5.7% per Refinitiv but -3.0% excluding the energy sector. Conference calls and guidance will be scrutinized.
More S&P 500 companies have issued negative EPS guidance for the second quarter and for the full year compared to recent averages.
From Factset:
(Facset)
In terms of annual EPS guidance, 238 S&P 500 companies have issued annual EPS guidance for CY 2022 through June 30. Of these companies, 132 have issued negative EPS guidance and 106 have issued positive EPS guidance. The number of companies issuing negative EPS guidance is above the five-year average of 105 and above the 10-year average of 117 for this point in time of the calendar year (June 30). The current year has also witnessed the highest number of S&P 500 companies issuing negative annual EPS guidance through June 30 since CY 2019 (138).
Big U.S. banks’ second quarter profits to tumble on higher bad loan reserves
Analysts expect JPMorgan Chase & Co will report a 25% drop in profit on Thursday, while Citigroup Inc and Wells Fargo & Co will show 38% and 42% profit declines, respectively on Friday, according to Refinitiv I/B/E/S data.
Bank of America Corp, which like its peers has big consumer and business lending franchises, is expected to show a 29% drop in profit when it reports on July 18.
The plunge in profit stems from lenders adding to their reserves for expected loan losses, a reversal from a year earlier when they benefited from reducing those cushions as anticipated pandemic losses failed to materialize and the economy strengthened. (…)
Last month, JPMorgan CEO Jamie Dimon warned of an economic “hurricane,” while Morgan Stanley CEO James Gorman has said there is a 50% chance of a recession. (…)
Morgan Stanley, the sixth-biggest U.S. bank by assets and a major Wall Street player and investment manager, also reports on Thursday and is expected to show a 17% decline in profits.
The fifth-biggest bank, Goldman Sachs Group Inc. (GS.N), is expected to report a 51% profit drop when it reports on July 18. (…)
Banks’ asset management businesses will also report lower revenue on lower stock and bond prices, Goldberg said.
Also, from Morgan Stanley’s Mike Wilson:
The simple math on S&P 500 earnings from currency is that for every percentage point increase on a year-on-year basis it’s approximately a 0.5x hit to EPS growth. At today’s 16% year-on-year level, that translates into an 8% headwind for S&P 500 EPS growth,all else equal. (…)The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons…the recent rally in stocks is likely to fizzle out before too long.
(Morgan Stanley via The Market Ear)
(…) For the past six months, the US joined Europe and China — collectively the three largest car markets — in moving beyond the 5% tipping point. If the US follows the trend established by 18 countries that came before it, a quarter of new car sales could be electric by the end of 2025. That would be a year or two ahead of most major forecasts.
PAY PAL!
Musk Seeks to Abandon $44 Billion Deal Tesla CEO’s lawyer cites doubts over platform’s data on spam and fake accounts; Twitter threatens legal action
(…) At a minimum, Mr. Musk could be on the hook for a $1 billion breakup fee, based on the terms of his April 25 acquisition agreement with Twitter. But the deal gives him only limited leeway to walk away and pay only that amount—and it isn’t clear that his complaints about Twitter’s account data qualify. The agreement gives Twitter the right to try to force him to follow through on the acquisition if he seeks to cancel it for other reasons. (…)
One of Twitter’s most active and famous users, with now more than 100 million followers, he had complained about such concerns for years, yet had agreed during deal negotiations to waive due diligence of Twitter’s business. (…)
Even when contract terms are clearly spelled out, more often than not, deal clashes end in negotiated settlements which can include a price cut or one-time payments. (…)
Twitter’s advisers have suggested that its contract had more seller-friendly protections than Tiffany’s, and that the company has legal avenues to ensure Mr. Musk follows through with the deal, people familiar with the matter said. Its board is focused on getting the best outcome for shareholders, which it has so far determined is the $44 billion sale rather than a $1 billion breakup fee, the people said. (…)
THANK YOU!
The best they see for the U.S. economy over the next 12-18 months is +1.0% GDP growth, 5% CPI, short-term rates at 3.25% (6.0% in “Deep Recession”!), and 10Y Ts at 3.5% (5% in “DR”). These are among the most negative scenarios around.
A Logarithmic Map of the Entire Observable Universe
