Mixed Reaction to US Non-Farm Payrolls Report

All right, we have a breaking news episode. US non-farm payrolls has just dropped within the hour of recording this. So wanted to see then a couple things. What were the headlines? What happened from the numbers perspective? More importantly, how did the markets react? And of course, I've got Master Jedi Piers Curran on the call to unpick that for us. And then I guess the third part is about what does this mean for the future, uh, and are the Fed behind the curve? Are they going to arrive right on cue? This idea about the major theme for markets, uh, going into the, the final stretch of 2024 and rate cuts. So first things first, let me just give you some top-level numbers. So nonfarm payrolls rose by 142,000 last month. A few stats: that leaves the 3-month average at its lowest since mid-2020. The 142,000 in context— the Street was expecting 165,000. The unemployment rate edged down to 4.2%, first decline in 5 months, and average hourly earnings rose 3.8%. From a year ago. Now there's lots of other components of that I'm sure we're gonna dive into, but first take then, Piers, having seen the reaction.

Uh, well, first take, it's, it's a, it's a mixed bag here, but I'd say in the main it's negative. So I'd say it falls on the bad side of the, uh, sort of fence, but, but there's some actually positives in there as well. I mean, it's bad news, like job creation, and that stat you just mentioned there. All right, fine, the August figure, 142,000 jobs, okay, worse than expected, fine. But you just mentioned there something that's quite key, which is the 3-month average. Because look, month by month is pretty volatile, you know, it's hard to really be confident about really extrapolating some key economic themes out of one month's set of numbers, but a 3-month average is at a 4-year low, um, pretty much sums everything up. So that's obviously bad news, but what flips this slightly is that— because one of the key elements of this report we've been really worried about in recent months is the unemployment rate and how the unemployment rate has been ticking higher, and actually from kind of March, it's marched higher every month— April, May, June, July— and in July it hit 4.3%, which was the highest reading for unemployment we'd had for, for like 3 years, right? But it'd be marching higher, higher, higher, higher. So actually this month, for August, it's dropped back a little bit, only by 0.1%, so it's really still at its highest level for a few years. But at least that didn't go up again. So that's the slight positive here in this report. But markets, have they reacted? It's quite interesting when you get conflicting pieces of information. It makes— well, when you're looking at price action in the real short term, it's just a mess. And what you tend to find is that it's the algos, it's that those computer sort of traders. It's the algorithmic trading systems. They go first and they tend to trigger off the headline number, non-farm payrolls. So if all you look at that, if that's all you're looking at, bad news again. And so what's interesting though, how did markets react? Well, the dollar weakened. And then if you look at stock markets, stock markets went up. Okay, and that, and that might be a bit counterintuitive if the job creation numbers worse than expected, but stocks go up. And the reason stocks initially went up is because people are going, aha, bad news is good news, because, you know, the worse this job market gets, the more likely the Fed will be more aggressive with rate cuts. And there's people out there desperate for a half a percentage point, a 50 basis point cut from the Fed when they meet, um, in, well, 10 11, 12 days' time. I think it's 18th of September, I think, is the announcement, right? So yeah, people are desperate for 50 basis points, and that bad number on payrolls, they were like, ah, fantastic, maybe we'll get the 50. So that explains the initial reaction in markets.

And was the market kind of priming itself for a 50 outcome today because of— if you look at equity performance in the run-in to today, I mean i.e., yesterday, things were souring going into this. And was that sort of ADP and general sentiment, and that— has that played a part in today's initial reaction?

Right, so going in, like, with the first week of the month is always really key. It's the most important month for macro data. I hesitated there because actually the inflation data Well, that comes in the second week of the month, and like for the last few years, it's been all about inflation. But as we explained on the podcast last time, things have changed, and the new game in town is the labor market. And so all of the labor market stuff comes in week one of the month, right? And so we've had a lot of data this week already, you know, culminating in this kind of headline item today. But the other data, again, it's been a bit mixed, but but more on the bad side. So the bad stuff, um, so back on Tuesday, because the US had a bank holiday on Monday, so it bumped some stuff into the Tuesday. So we had the ISM Manufacturing Report, that was bad news. We had the ADP Employment Report, worst number for job growth in the private sector for 3 years. Um, you know, we had the actually, uh, the JOLTS Job Opening figure dropped, lowest number for 3 years. So that, that's kind of bad news. That's all saying, look, this labor market is continuing to lose momentum, it's continuing to deteriorate. That's kind of economic alarm bells starting to go off. There were a couple of counters. So the jobless claims number, that's looking at people claiming unemployment, that actually dropped, which was a good— that's a positive thing. So that was a bit of a contradiction. And and then something called the ISM Non-Manufacturing that actually was pretty solid. So we've had a bit of a mixed bag across all of these really important data points. But when you feed in today, yes, that unemployment rate ticked down marginally, but here we are now, we've had the full set of numbers throughout the whole week, and what it tells you is that the economy is continuing to decelerate. And that labor market is continuing to lose momentum. So all that's left is for you to decide, will— is it decelerating fast enough for the Fed to be more aggressive and cut 50, or is the deceleration slow enough that they're going to be more cautious and only cut 25?

And actually, there was a Fed watcher and comments came out within the hour of the drop of non-farm. This is all very usually quite tactical, uh, as a voice piece of the Fed to kind of somewhat through unofficial channels communicate to the market of how they feel with what they've just seen. So this guy is from the Wall Street Journal. So the way it works is in, I would say, in Europe and the UK, it tends to be a Bloomberg source. Whereas in the US it's the Journal which usually carries it. It's a guy called Nick, uh, Tamiras is his name. He's like the— he's been there for a couple years now. I think it was John Hilson-Rath, if you remember, back in our day.

Absolutely.

Um, and so what Nick has said is the jobs report does not resolve the tactical question of the size of the first rate cut. The headline figures weren't bad enough to make 50 the base case, but in light of the revisions, it wasn't good enough to convincingly and cleanly douse speculation of a larger cut. So basically, I looked at the market pricing— what are we at the moment? And it's basically 50/50 how, how the rates market is priced.

So you mentioned a word there, revisions. So we haven't mentioned that yet, because when these numbers get reported, so So just now we've had the August number, right? So it's 142,000 jobs created. Great. That's the most important, it's the most recent. What they also do then is if, if there are any revisions, they tell us about changes to the previous months. So we've just had August data and they say, actually, we've had more time to crunch the numbers on July now, and having now spent more time on those numbers, here's the revision, and they revised it quite sharply down. So July went, I think, from— it was when they reported it a month ago first time, I think it was reported at 114,000. And you remember back first week in August, that was one of the key catalysts for that big sharp sell-off in markets at the start of August. The number was 114,000. Well, they've just revised it. It was a lot worse than that. They've actually revised it to 89,000. And that is straight up their worst month since December 2020. And I've got another chart which is looking at— well, okay, today they revised down July, but if you kind of go back through the months, how have the revisions been typically going backwards each month? And actually, of the 1, 2, 3, 4— of the last 7 months, the backwards-looking revision has been negative 6 times. So 6 out of 7, they're revising it down and revising it down. I don't know if people caught in the news a couple of weeks back, they also do an annual revision. And so 2 weeks ago, they basically said, yeah, for the 12 months— I think it is the 12 months of 2023— they said, oh, by the way, there were 800,000 jobs created less than we told you. And it's like, what? Okay, so basically they report these numbers, then the next month they revise them down, and then in 12 months' time they revise them sharply down again. So it's kind of like, what is even the point here? So 142,000 jobs created in August? No, there weren't.

Yeah, it's so interesting, isn't it, with the even know what you're saying. So from a statistical researcher's point of view, it's a highly inaccurate process, but that has zero bearing actually of what markets are moving on and how they're reacting, right? Because everyone knows what you've described, and yet the market needs to react on, on something.

But is it— isn't it irrational that— so if you say, look, and you're absolutely right, I, you know, you shouldn't be too critical trying to measure the number of jobs created. That's a really messy task because there's so many, you know, small tiny companies, you know, one-man bands. And how are you supposed to measure what's going on in all of these tiny little companies that makes up a really big proportion of the labor force, right? So it's really difficult, but they get it— they overestimate it every month and they revise it down the next month almost every time. So that to me says, yes, it's messy and difficult, but the way they're doing it is fundamentally flawed.

Uh, you obviously didn't get the, uh, Biden memo then.

Who, who's that?

Oh, he was, it was some guy from many, many years ago.

Isn't he? Isn't he dead? Oh, maybe not.

Well, anyhow, looking further forward then, the net result is we're not a great deal better off here between the 50 and 25. But there's a couple of big things still to come, right? Such as CPI and retail sales before we get the actual D-Day, right?

So that's week 2 of the month. They're the 2 key prints in the second week of each month. Inflation and retail sales. And yeah, so they will come before then the Fed goes the week after. But look, I— you know my stance here, and this, this data is perfect for my opinion. And that, that my opinion is that the economy is decelerating, the job market's losing momentum, but the Fed won't cut. By as much as the market wants. So remember, the Fed— I think the stats now, let me just check— for by December, I actually think they're pricing in 115 basis points worth of cuts now. So that's actually more than a percent, right? That's 1.15%. That's, that's more than 4 rate cuts if you think they're going to move at 25 basis points per time. But there's only 3 meetings left, so the market's pricing in that at 2 of those 3 meetings there's a chance they'll cut 50. I think that is— it's madness thinking that right now. And that's because the labor market is losing momentum slowly. You know, the unemployment rate ticked back down. So if that unemployment rate had ramped up even further, then sure, it's justified and it's rational to say, well, you 'Look, maybe they're going to have to go 50 because maybe the deceleration is gathering pace,' right? But the data is not there. So that's why I think— and you've seen that in these markets. I mentioned to you that initially stocks went up. I mean, and I mean like in the seconds following the data as those algos get all over it. So I'm looking at the S&P futures. So it went from 5,480 and it popped up to like, well, topped out at 5,530. So it did a 50-point, 1% rally.

Pop.

Okay. And now it's been really choppy and consolidated at the top of that rally. Now it's starting to come back down. So it's giving back those gains. So the first reaction is just looking at payrolls, which is bad. Maybe the Fed will cut 50. Where, hey, let's buy stocks. Now it's that more considered, well, hang on a minute, the unemployment rate dropped there, that, that's good. Average hourly earnings, we haven't mentioned, that's looking at wage growth, that went up faster than expected. So that's like inflationary, okay. So again, so the, the unemployment rate and the wage growth number, they're, they're, they're saying to the Fed, you cannot cut 50 basis points here. You know, you need to be more cautious with 25. So that's why the stock market's starting to give back some of those, um, you know, knee-jerk reaction gains.

And perhaps you could just explain, just so it's crystal clear for everyone listening, stocks have pulled back after that initial blip high, as you said, but the NASDAQ pulled back more aggressively and is selling off harder than, say, the S&P. So perhaps you could explain why that is.

Well, it's because ultimately— well, that's a, that's a, that's a tricky question. I mean, I would say that over the last— it's a pattern that's been the case for the last, I want to say, 2 weeks, and you could say longer and actually say 2 months. The pattern being that the tech led rally of 2024 has now changed and tech are no longer leading. And so we had, we talked all about NVIDIA and how their numbers weren't rockstar enough to continue their rally. They've been chopped back sharply. And now that rate cuts are coming, I mean, you're splitting hairs to a degree when you're saying, well, are they going to cut 50 or is it going to be 25? The bigger, broader point is that the rate-cutting cycle will begin in September. And so when you're looking at sectors, certain sectors benefit much more from rate cuts. So the real estate sector, best-performing sector of the year. Okay, so the S&P 500 carries these other sectors that benefit from rate cuts like real estate. The NASDAQ doesn't have those other sectors. NASDAQ's just tech, right? And the big tech giants, they're— you could spin one argument to say that when interest rates are high, well, that's good news for the Mag Seven because they don't need to borrow any money. They're cash rich, and so they're not sensitive to high interest rates, which is one of the reasons why the Mag Seven's been so outperforming, you know, in the 12 months up till this summer. So The, those rate-sensitive sectors that are now outperforming because the rate-cutting cycle is going to start, that's what's making the S&P's performance relatively better than the NASDAQ.

Okay. Understood. Crystal. And then, um, anything else to add before we wrap it up? I know this is gonna be a bit of a short, sweet one just to tackle the numbers.

There's two things actually. Number one, so that 142,000 jobs lost— uh, sorry, lost, that would have been news— uh, 142,000 jobs created, right? But then when you look at the different sectors, it's interesting to note that manufacturing is really the standout worst performer from a job creation point of view, which backs up what we heard on Tuesday because the ISM manufacturing number was really bad. So actually manufacturing on its own lost 24,000 jobs. Tech then lost 7,000. They were the two sectors with a negative job number. All the others were then kind of zero to positive. The big contributors were leisure and hospitality— makes sense, it's the summer, it's August, right? Government jobs were up 24,000. Construction was up— well, construction was the second best performer, or sorry, third best performer. Again, makes sense, right? Because of the real estate situation. And again, in the housing situation in the US, they're having to try and accelerate home building because existing homes are kind of off the market. People aren't moving because they don't want to lose their, you know, very low long-term interest rate they've got on their mortgage. But that's a different story anyway. So that was something interesting when you split out the different sectors and which sectors are adding jobs, which ones are losing. And then maybe the final point was something completely different, and I know you love, you know, you love this. I want to talk about the yield curve. And you might have heard, I mean, you can't have missed it, like in the last 2 years, although nobody's been talking about it for the last 6 months, but over the last 2 years the US yield curve has been inverted. So that means that short-term interest rates, short-term yields are higher than long-term yields, which is very unusual, shouldn't really happen, but it did. And the economists out there say when that does happen, it's the best recession indicator of all.

And what, what, what was the average time duration between that happening and the recession happening?

It was like 9 months.

Okay. And how's, how's the recession been?

So you're right to rubbish this theory, but the theory is when it inverts, basically on average 9 months later the economy goes into recession. But it's been 2 years now since the inversion, and yet we haven't had a recession. But look, it's an incredibly unusual cycle because of COVID But the key point is about this inversion. Yeah, average 9 months later you get a recession, but before the recession what always happens is the curve un-inverts, then the recession comes. And that's because it makes sense, because when the recession's on the horizon, the Fed start cutting rates, which is what brings down the short end of the curve and it un-inverts it, right? What— why am I saying all of this? Because whilst the curve has been inverted for 2 years, it's not anymore. So this week the curve un-inverted. And so some out there might be saying, well, actually, here you go then, that's yet another sign that whilst it's been inverted for a crazy amount of time, this un-inversion may well now be the signal to add, add some weight to that theory that a recession is coming.

Okay. And, and US GDP is at what level? So is it 3% or 3.1% in second quarter of 2024?

Well, I mean, second quarter's a long time ago, right? You know, we're into the final month of quarter 3 here. Uh, but you are right to say, I mean, it's definitely tracking at above 2% growth in this quarter. But look, you know, an un-inversion is an un-inversion, and on that nugget my case rests.

Oh God, it sounds like we're in Inception or something. I'm gonna have to snap you out of your fall to bring you back to this bearish new person that you've become. I was just having a quick look at the, um, GDPNow, the Atlanta Fed GDPNow tracker.

Okay. Yeah. I'm interested. I haven't looked at that for a long time. Tell me.

Okay. So that is latest estimate as of the 4th of September, 2.1%.

For quarter 3.

So yes.

Has it got a quarter 4 forecast on there yet? No. Okay. But what was it in quarter 1?

So here it's got the GDPNow estimate in the third quarter of 2024 was 2.1%. On the fourth, that was revised up from 2%. And that was, that was actually just a few days prior. Let me have a look at the chart to see how it's moved. So it looks like at the end of July it was tracking at about 2.9%. It dropped in mid-August to 2%, and then it's gone back up to 2.5% at the end of August and dropped back down to 3%.

Hmm.

But it's still been up in the 3, 2.5. Yeah, it's decelerating to a sense of, I guess, in the last 3 months from 3 to 2.

Yeah. Deceleration. That's the word. Deceleration, un-inversion.

Promise me one thing. So when we go back into an inversion, please do not come on this show and say, when an inversion un-inverts and re-inversions, it's a key recession signal. Look out, guys.

You've nailed it.

All right, so everything. All right, well, what I'll do is on Spotify, I'll add the poll feature, and I'd like everyone listening, if you're on Spotify at least, to choose one of two options. Are they going to go 50 or 25? The fate of the Fed and the US economy is in your hands. All right. Thank you, Piers, and thanks, everyone. We'll see you next time.

See you later.