Everybody Got it Wrong

Friday, August 5, 2022

Event                                                               Actual   Forecast   Previous

Nonfarm Payrolls (Jul)                                   528K     250K         398K

Unemployment Rate (Jul)                               3.5%     3.6%         3.6%                 

Average Hourly Earnings (YoY) (Jul)            5.2%      4.9%         5.2%

I’ve often quipped that I would listen to one chartist over ten economists, any day. Case in point was today’s Unemployment data showing a string of miscalculations that caught the economists and the markets by surprise. But not me.

The markets are overbought, and not just a little overbought. And much of the rally was based on growing optimism that the economy was slowing and that would force the Fed to cease raising interest rates. This followed the debate on whether or not the economy was in a recession, which I dismissed as irrelevant at this time. The reason is, in my opinion, if today’s number serves to have influence on next week’s Consumer Price data (CPI) and Producer Price data (PPI) the Fed will not only increase interest rates but will have to focus on slowing the economy overall, the only strategy that has ever worked in in the history of Federal Reserve actions.

For now, the economic data has shown definite moderation in some sectors. An example is this week’s ISM data that showed Non-Manufacturing increased in July, while Manufacturing data decreased in July. Housing has been under pressure, mostly New & Existing Home Sales. But the consumer has been busy, as usual, mostly in the restaurant and leisure space, less so in the durables (utilities, autos, etc.).  On top of this certain sectors, such as Tech, have announced hiring freezes and in some cases layoffs. This is an environment that has fed the slowdown narrative. 

When I say the broad indexes are over bought, it is a condition that can occur in bear or bull market. But because, in my opinion, there is the potential for a recession, perhaps not this year, the overhanging dark cloud needs no new uncertainties. Today’s employment data added to the uncertainties and the strength should not be ignored. Since the pandemic became the source of newfound corporate responsibility, companies have been increasingly servicing the employee over the shareholder, even in some cases executives taking salary cuts to preserve the balance sheet without laying off workers. In this respect the strength in employment that is at odds with much of the rest of the economy questions the strategy the Fed will have to initiate, which in my opinion, will be more aggressive than the markets currently expect.  

On a final note, I’m not confident that this condition will end anytime soon. Legislation in Washington is still spending (printing) money, increasing capital in the consumer pocket, raising taxes, and taking it out at the same time. Not an economically friendly move to make at this time of economic uncertainty. Will this make a difference? Will changes from the November elections make a difference? Will the economy continue to moderate while employment continues to be strong? Will the Fed have any choice but to be so aggressive that the markets become convinced that a recession in imminent? A lot of questions, the answer lies in the behavior of the investor. If overall equity price action can work off some of the recent rally, the buying, in my opinion, will come back, and the strength of that comeback will determine the future direction of the markets. I’ll continue to wait, be cautious and be ready.