Payroll employment rises by 372,000 in June; unemployment rate remains at 3.6%

• Total nonfarm payroll employment rose by 372,000 in June, in line with the average monthly gain over the prior 3 months (+383,000).
• The change in total nonfarm payroll employment for April was revised down by 68,000, from +436,000 to +368,000, and the change for May was revised down by 6,000, from +390,000 to +384,000. With
  these revisions, employment in April and May combined is 74,000 lower than previously reported.
• Private-sector employment has recovered the net job losses due to the pandemic and is 140,000 higher than in February 2020, while government employment is 664,000 lower.
• Over the past 12 months, average hourly earnings have increased by 5.1 percent.

This chart shows unemployment claims with the scale set to reflect levels between 2014 and 2019. The horizontal line is the average for that period. The low in claims was in March; they are up 36% since.

Two Fed Officials Endorse Another 0.75-Point Rate Increase The central bank could debate whether to shift to more traditional quarter-point rate rises in November, Fed’s Christopher Waller says.

(…) “Inflation is just too high and doesn’t seem to be coming down,” said Fed governor Christopher Waller during a webinar on Thursday. “We need to move to a much more restrictive setting in terms of interest rates…and we need to do that as quickly as possible.”

Mr. Waller said he was “definitely in support of doing another” 0.75 percentage point, or 75 basis point, rate rise in July.

St. Louis Fed President James Bullard also told reporters after a presentation in Little Rock, Ark., that “it would make a lot of sense to go with 75 [basis points] at this juncture” in order to raise rates to around 3.5% by the end of this year. (…)

Mr. Waller said he expects the Fed would need to raise rates by a half percentage point at the central bank’s following gathering in mid-September, which would put rates closer to levels designed to deliberately slow the economy. After that, he said the central bank could debate at its November meeting whether to shift to more traditional quarter-percentage-point rate increases. (…)

Mr. Waller said market jitters about a recession are overblown but acknowledged the central bank would need to accept higher risks of a downturn in order to wring inflation out of the economy. He said he thought it was possible that slowing the economy for around a year “may be sufficient to get inflation back down without causing a real severe recession.” (…)

Monthly increases in the Fed’s preferred inflation gauge, excluding food and energy prices, have slowed in recent months, but Mr. Waller said the recent pace of inflation is still too high. “That’s not acceptable to say, ‘Oh, let’s just keep it where it’s at,’” he said.

Readings on monthly core inflation need to reach levels consistent with 2.5% or 3% annualized rates by the beginning of next year to “really think about backing off on interest rate hikes,” said Mr. Waller. “Right now, it doesn’t look like that’s going to happen.” (…)

“That’s the whole thing we know about expectations: Once they become un-anchored, you’ve lost,” he said. “I never want to get to the point where these things keep creeping up. We’ve got to chop this off now.”

Mr. Waller, a strong transitorist last year, is totally behind Powell leaving employment on the back burner until the inflation dragon is killed. So much so that he has policy anchored until November. So much for the “data dependent” Fed. Read what Waller said on May 13, 2021:

An outcomes-based policy stance means that we must see inflation before we adjust policy—we will not adjust based on forecasts of unacceptably high inflation as we did in the past. Call this the “Doubting Thomas” approach to monetary policy—we will believe it when we see it.

We asked to see it, and lo and behold, we are now starting to see inflation exceeding our inflation target. But the critical question is: for how long? Although inflation is starting to exceed our 2 percent target, in my view, this development is largely due to a set of transitory factors that are occurring all at once.

Right when they started to see inflation exceed their target, they still forecasted that it was transitory.

The US Industrial Complex Is Starting to Buckle From High Power Costs Surging bills are forcing companies to scale back industrial operations, threatening a greater drag on the economy.

(…) On June 22, 600 workers at the second-largest aluminum mill in America, accounting for 20% of US supply, learned they were losing their jobs because the plant can’t afford an electricity tab that’s tripled in a matter of months. Century Aluminum Co. says it’ll idle the Hawesville, Kentucky, mill for as long as a year, taking out the biggest of its three US sites. A shutdown like this can take a month as workers carefully swirl the molten metal into storage so it doesn’t solidify in pipes and vessels and turn the entire facility into a useless brick. Restarting takes another six to nine months. For this reason, owners don’t halt operations unless they’ve exhausted all other options. (…)

At least two steel mills have begun suspending some operations to cut energy costs, according to one industry executive, who asked not to be identified because the information isn’t public. In May, a group of factories across the US Midwest warned federal energy regulators that some were on the verge of closing for the summer or longer because of what they described as “unjust and unreasonable” electricity costs. They asked to be wholly absolved of some power fees—a request that, if granted, would be unprecedented. (…)

This summer, electricity rates for industrial customers are set to hit their highest levels ever, based on US government forecasts. Because US plants and factories depend on both electricity and gas, this could very well be the moment the rug’s pulled out from under American industry.

Manufacturing overtime hours have already declined for three straight months, the longest downward stretch since 2015, and a measure of US manufacturing activity weakened in June to a two-year low as new orders contracted. A week after Century’s announcement, the nation’s largest aluminum producer Alcoa Corp. said it’s closing a third of its production at a mill in Indiana because of “operational challenges.” (…)

Manufacturing isn’t the bellwether of the US economy it once was. The plants that 70 years ago employed more than a third of the nation’s labor force now account for about 8% of nonfarm workers. An industrial downturn on its own won’t tip us into a recession, but it could if combined with weakness in other sectors. (…)

“I don’t see any scenario, absent explosions at US LNG facilities’’ that trap supplies at home, in which gas prices are headed lower in the long term.

• One signal that America’s demand for goods is cooling: The cost of shipping is receding quickly, Axios’ Kate Marino writes.

Data: Freightos; Chart: Axios Visuals

Food Price Drop Offers Limited Relief to Squeezed Shoppers

Global food prices dropped from a near record amid prospects for fresh supplies and fears about a recession, potentially offering some respite to strained households. A UN index of world food costs slipped 2.3% last month, the third decline in a row, but the index is still up 15% this year.

1st Look at Local Housing Markets in June Sales Down Sharply

(…) I’m tracking about 35 local housing markets in the US. Some of the 35 markets are states, and some are metropolitan areas.

(…) for these markets, inventory was up almost 50% from May to June.

Inventory in these markets were down 28% YoY in February, down 4% YoY in March, up 10% YoY in April, and up 44% YoY in May, and are now up 83% YoY! So, this is a significant change from earlier this year. This is another step towards a more balanced market, but inventory levels are still historically low. (…)

RBC Is First Bank to Predict Canada Headed For Recession in 2023

(…) “Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act,” according to the report, which was written by economists Nathan Janzen and Claire Fan. “Inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations.” (…)

Still, the recession in Canada will likely be moderate and short-lived by historical standards and will be reversed once inflation settles enough for central banks to lower rates, RBC said.

The Canadian economy is expected to contract by an annualized 0.5% pace in the second and third quarters of 2023, according to the new forecasts. Growth will average 0.8% next year, down from 3.7% this year. (…)

Canada will also feel the spillover from slowing global growth. The US unemployment rate is expected to climb and emerging markets will struggle with higher food and energy prices and borrowing costs, acting as a drag on Canadian exports. (…)

NDR’s Global Recession Probability Model has never been this high without a global recession (except in 1985). Actually, every time (ex-1985) it got this high, we were already in recession.

• From Princeton Energy Advisors LLC
• The University of Michigan Index of Consumer Sentiment hit a new low in June, 50.0, revised down from 50.2 for the prior read for the month.
• The US has always been in recession at these levels.
• The Atlanta Federal Reserve Bank is forecasting Q2 GDP at -1.9%; IHS Markit is forecasting -1.5% for Q2; Goldman Sachs is still in positive territory, but down more by more than half to 0.7% for Q2
• Given that Q1 GDP was -1.5%, the plain vanilla interpretation would see the US in recession starting in Q1 2022.

Still making history:

The commodity collapse – only seen this 3 times in 90 years

BCOM is “well” below the 200 day moving average and RSI is at levels not seen in “forever”. Most people have been bullish this entire space, and have not had the time to keep up with the stop losses. If a bounce is due we leave to you to decide, but as DB notes; rolling 20 day change in BCOM is pointing for the “3rd largest fall in 90 years”. The hard lesson of “managing” big draw downs is being learnt by a lot of people at the moment (chart 3).

Refinitiv

DB

To the rescue?

China Considers $220 Billion Stimulus With Unprecedented Bond Sales

China’s Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year, an unprecedented acceleration of infrastructure funding aimed at shoring up the country’s beleaguered economy.

The bond sales would be brought forward from next year’s quota, according to people familiar with the discussions, who asked not to be identified because they aren’t authorized to speak publicly. It would mark the first time the issuance has been fast-tracked in this way, underscoring growing concerns in Beijing over the dire state of the world’s second-largest economy. (…)

The funding would add to 1.1 trillion yuan in new support for infrastructure announced over the past few weeks, as President Xi Jinping’s government tries to get the economy back on track toward achieving its annual growth target of around 5.5%. (…)

• China developers face $13bn wall of dollar bond payments in second half
• Developer fundraising in bond markets is starting to pick up.

Gavekal Research via The Daily Shot

Historic Cascade of Defaults Is Coming for Emerging Markets Number of developing nations trading distressed has doubled, with El Salvador, Ghana, Egypt, Tunisia and Pakistan appearing particularly vulnerable.

• Peru lifted its key rate to 6% as inflation is running at a 25-year high.

BofA Says Recession Fears Prompt Investors to Dump Stocks Again

Investors are hoarding cash and hiding in US Treasuries as they dump equities amid fears that the US economy is headed for a recession.

Nearly $63 billion flowed into cash in the week through July 6, while global equity funds had redemptions of $4.6 billion, according to Bank of America Corp. note citing EPFR Global data. US stock funds still saw their second week of additions, while global bonds had their biggest inflows in 14 weeks at $2.4 billion thanks to the buying of Treasuries and government debt, Bank of America said. (…)

Bank of America and Morgan Stanley strategists have warned that the slowdown in global economic growth could be worse than expected, adding pressure on the S&P 500 Index in the second half. Rate hike concerns are also back on the table with two of the Federal Reserve’s most hawkish policy makers backing another 75-basis points hike this month.

Hartnett said the S&P 500 was likely to be range-bound at 3,800-4,200 this summer rather than seeing a continued rebound. “Bear markets end with a recession or an event that causes Fed to reverse policy; we say bear market in summer hiatus, and bear ain’t over and Big Low has yet to be reached,” the strategist wrote. (…)

• The anatomy of the SPX bear

How is the current bear market developing compared to history? Food for thought via TS Lombard: “Current bear is close to the average trough of the “minor” ones (<12 months in duration). It is, however, still a long way away from the “major” bears (>12 months in duration).

Only two of the past 13 bear markets were not associated with a recession. The average drawdown for those was 28%, compared with 43% for the recession bears. The current 20% drawdown is short of both.”

So are we bottoming out? “Two past bear markets had drawdowns of 20-22% – in 1957 and 1966; and only in the case of the former was there a recession. But with no sign of Fed easing, data bottoming out or market capitulation, a bottom does not seem close.”

• Desperately Seeking The Low

• Relative fund flows between defensive and cyclical sectors have been extreme.

Source: SPDR Americas Research, @mattbartolini

• S&P 500 Large Cap Index – 13/34–Week EMA Trend

Beijing Scraps China’s First Vaccine Mandate in Abrupt Reversal

(…) pushback from the public was swift, with some residents taking to Chinese social media to call the requirement an illegal limitation on their freedom and question how effective the vaccines are against the highly contagious and immune-evasive omicron variant.

“The reversal shows the power of public opinions,” Hu Xijin, former editor-in-chief at the Communist Party-backed Global Times and an influential commentator, said on his official Weibo account. “The Chinese society is dominated by government. They timely backed up in the face of a public pushback. That means they accept the public’s view of the vaccine mandate as illegal.” (…)