The Treasury Market is Over its Skis
The Fed isn't, or at least shouldn't be, as close to a cut as the market thinks
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This morning’s NFIB Small Business Survey put an exclamation point on the recovery in business confidence in May as the end of the inventory destocking mitigates trade policy uncertainty. In other words domestic demand is more important than external demand.
https://ironsidesmacro.substack.com/p/flash-business-confidence-update
The release of China and Taiwan’s May trade data Sunday night showed some stabilization in Asian trade. To be sure global trade is decidedly weak and the effects of additional barriers to trade don’t bode well for a robust recovery. Still, it should be noted that Asian export growth remains stronger than during the 2014-2016 Chinese heavy industry hard landing related slump.
We are unconvinced by Friday’s May employment or last Wednesday’s ADP report that the labor market weakened significantly. We find the obsession with net payroll gains one of the greatest follies in finance; 75,000 net jobs divided by 151,095,000 total employed is 4.96 basis points. April’s Jobs Opening and Labor Turnover Survey (JOLTS) reported 5.562 million private sector hires, up from 5.345 in March, 5.234 million separations vs. 5.171 million, 3.3 million of the separations were voluntary (quits). The increase in hiring and quits marginally increased the quarterly turnover rate to 24.79% after a period of retracement following very strong increases in late 2017 and most of 2018. You read that correctly, nearly 25% of the labor market is reallocated every quarter, yet, the market obsesses over a 5bp net change in monthly payrolls. Our measure of labor market dynamism leads wage gains by 12 months and is productivity positive, as opposed to unemployment or other measures of slack, that degrade productivity.
We get how JOLTS is reported with a one month lag relative to the monthly employment report, however, the job leavers measure in the May employment report increased from 12.6% in April to 13.5% and the median duration of weeks to find a job dropped to 9.1 from 9.4 in April and 9.6 in March. The May Conference Board’s jobs plentiful and jobs hard to get survey questions improved to the best levels in two business cycles. Taken with the business confidence measures, it seems likely that turnover improved further in May and has regained positive momentum.
We think the narrative that growth has slowed is likely incorrect due to placing too much weight on the rates market relative to equities and international relative to domestic demand. It appears to us that business confidence improved sufficiently to reinvigorate investment in capital and labor. The completion of the inventory destocking process from the sharp drop in domestic demand in response to the 4Q18 QT Crash is more important to the US economy than soft global trade. Friday’s May retail sales report is the next important data point in determining if domestic demand has recovered sufficiently to work off excess inventories in turn restarting domestic industrial production.
Importantly, an increase in capital investment and labor turnover are both favorable factors for productivity, this implies non-inflationary growth. So, this mix of growth is not a reason for the Fed to tighten policy. The monetary policy mistakes last year were underestimating the productivity gains and the effects of quantitative tightening by the ECB and BOJ on their balance sheet contraction. Still, with equities close to their highs and the domestic economy in better shape than the bond market implies, rate cuts are far from a sure thing. No question the Fed changed their bias to ease, however, we are not confident they will do so and suggest front-end steepeners, and in equities, selling bond surrogates.
Barry C. Knapp
Managing Partner
Ironsides Macroeconomics LLC
908-821-7584
https://www.linkedin.com/in/barry-c-knapp/
@barryknapp
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