Today is Cinco de Mayo. While many Americans think this is Mexico’s Independence Day, it is actually a somewhat secondary holiday south of the border. By just about all accounts, it is more popular in the United States where it is a celebration of Mexican-American heritage. It is also a reason for a lot of us to drink margaritas and eat queso dip.
As fun as that might be for many, today was a big day for investors for a different reason. This being the Bureau of Labor Statistics’ (BLS) release of ‘The Employment Situation – April 2023.’ Folks had been waiting with baited breath to see if the labor markets had weakened as much as some of the other economic data.
After all, the Federal Reserve (Fed) has a so-called dual mandate of price stability and full employment. As we all know, the official inflation gauges have been coming down, and likely will continue to do so through June. At that point, they will stop cold in their tracks, and likely won’t get to the Fed’s desire 2.0% number.
On the flipside, the official jobs market has been bizarrely strong. How is it U.S. employers are still adding so many jobs this late in the tightening cycle? Nonfarm worker productivity has been pitiful since the start of 2022, falling 9.4%. No kidding, it is a real head-scratcher.
After all, if the labor markets are tight and inflation is higher than desired, why would the Fed reverse course? Why would it stop raising rates, which it did again this past Wednesday? More importantly, why would it start cutting rates the way the Street seems to think it will?
According to the WIRP function on my handy Bloomberg terminal, the futures market believes the Fed will start reducing the overnight rate in September. By next January, it believes the Fed will have cut rates by 100 basis points (1.0%).
Obviously, that would be good for financial assets. But, will it?
At precisely 7:30 CDT this morning, the BLS cut the suspense. It announced the U.S. economy created a surprisingly high 253K net, new payroll jobs in April 2023. That was well above the Bloomberg survey’s median estimate of 185K, and almost near the highest one (270k).
What’s more, the official unemployment rate fell to 3.4%. That is a miserly low number, near 60-year lows.
Here is the rub:
- The spread between the U.S. 10-Year Treasury Note and the target overnight lending rate is about (1.75%).
- That means the yield curve is inverted, which has always been an impediment to borrowing and lending.
- Further, according to the Fed’s weekly H.8 report, deposits in the US banking system have fallen an eye-watering $960.3 billion over the last 12-months (4/13/2022 – 4/19/2023). Trust me, that isn’t normal.
- Finally, loans and leases on bank balance sheets have grown at a miserly 1.07% rate since the beginning of the year, and have fallen from their March 15 highs.
If that isn’t depressing enough, the Fed’s regional purchasing manager’s report have been dreadful, and Leading Economic Indicators have been negative for the last 12-months. Do you want one more? Okay. The most commonly used measure of the money supply in the US, M2, has fallen $885.1 billion since last July.
THE MONEY SUPPLY (M2) DOESN’T FALL VERY OFTEN, DOES IT?
So, to recap:
- The money supply is falling
- Loans growth is basically at a standstill
- The yield curve is inverted
- Deposits have shrunk
- And worker productivity is miserable.
Even so, the Unemployment Rate is 3.4%, and the economy added 253K payroll jobs last month.
There has to be some miscommunication in the system somewhere. Why is job growth still this robust when just about everything tells us it shouldn’t be?
A quote from this week’s ‘April 2023 Manufacturing ISM Report on Business’ from a respondent in the primary metals sector sums things up nicely:
“We seem to be in a season of contradictions. Business is slowing, but in some ways, it isn’t. Prices for some commodities are stabilizing, but not for others. Some product shortages are over, others aren’t. Trucking is more plentiful, except when it isn’t. There’s uncertainty one day, but not the next. The next couple of months should provide answers — or not. It’s hard to make projections at the moment.”
Indeed, we are in a season of contradictions. This makes planning and capital expenditure decisions more difficult for companies. Further, given the recent banking missteps, is anyone really confident with the availability of credit throughout the remainder of the year? If that weren’t enough, how much longer can the U.S. consumer keep spending money when credit card interests are going through the roof?
To that end, the Federal Reserve announced ‘consumer credit outstanding amount revolving’ in the US hit an all-time high of $1.22 trillion in February, the last observation.
In a related story, as of yesterday, the Prime rate is 8.25%. That is the highest it has been since August 2007.
So, you tell me. All-time high revolving debt and interest rates at a 16-year high? It will be interesting to see just how the US consumer responds to this moving forward.
Last week, I wrote in this column how I generally consider myself an optimist. Clearly, I am not being one today. In fact, this has been downright pessimistic, and I apologize for that. But as negative as I have been, you know, there are still a lot of businesses out there who feel pretty good about things. How else do you explain such a strong labor market? 253K new payroll jobs in April? An Unemployment Rate of 3.4%?
At the end of the day, that matters. Because if US employers are adding jobs, they are creating consumers. That is a good thing for a consumer driven economy, and suggests a worst-case scenario probably won’t happen. Probably. If so, that could be cause for celebration.
Speaking of which, why don’t we just throw in today’s Employment Situation report with Cinco de Mayo. Two causes to rejoice and raise a glass, even if we aren’t exactly sure exactly what it is we are celebrating. Let’s not overthink things, am I right? Sure, just don’t mind me if I sip my margarita instead of chug it.
John Norris
Chief Economist
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.