Eric Sturdza Bank Rate Chronicle.
Nonfarm Payrolls Friday: Take the 4th of July off!
Many investors will, rightly, be interested in the employment statistics published on Friday. The market consensus is for an unemployment rate of 4% and 190,000 jobs created in June. We will especially watch with great attention whether the 272,000 jobs created in May are revised downwards.
In light of our column last week, which pointed out a growing risk of a repeat of the 2008 housing crisis, we would be tempted to say, in a willingly provocative tone, that the labor market statistics have become secondary in our eyes. Six months before the collapse of Lehman Brothers, which plunged the world into economic chaos, the unemployment rate was 4.9%. It could have reached 4% and the result would have been the same. Our main concern today is not even inflation. It is the slowdown (or even the beginning of a recession) in sectors hypersensitive to interest rate levels, particularly real estate. It is this crucial element, and not the level of inflation, that will dictate the Fed’s policy.
Relief on the inflation side
On the macroeconomic front, last week was dominated by the publication of the PCE Deflator and Core PCE inflation statistics. They came out in line with market expectations, with Core PCE declining from 2.8% to 2.6%, which validates the good news that the CPI and PPI indices had brought us a little earlier in the month. This slow decline is especially compatible with a return of inflation to levels close to 2% in early 2025. However, the general public, not necessarily passionate about these statistics, will logically have become passionate about the great debate that caused Joe Biden’s rating to plummet in the polls.
Today, as we begin to feel relief on the inflation front, the economic situation reminds us. New home sales plunged 11.3% in May (-0.2% expected) and while Q1 GDP is confirmed at 1.4%, household consumption is revised from 2% to 1.5%. We can legitimately wonder what the second quarter has in store for us. Two companies have communicated their concerns on this subject. Walmart has indicated that consumer behavior is changing abruptly and that its business could suffer. Walgreens has had to lower its earnings target, describing a “challenging consumer environment”. Management had hoped that consumption would remain strong but has found that this is not the case. If Walgreens is facing its own difficulties (they announced at the end of the week the closure of 8,600 points of sale in the United States), the observation made by its leaders remains valid: what if the American consumer, who still represents more than two-thirds of the GDP, started to reduce his spending? This would not be surprising knowing that a Trump administration will probably be less generous than the Biden-Yellen tandem.
Jackson Hole, August FOMC bis
Between the next FOMC scheduled for July 31 and the following one on September 18, it may be wise to consider that this year, the Jackson Hole symposium will serve as a second FOMC. From August 22 to 24, it will be necessary to carefully analyze the comments of the various speakers because if everyone more or less agrees that the FOMC of July 31 will be a non-event, the one in September should be the scene of a possible first rate cut by the Fed.
The 10-year, which had fallen below the 4.20% mark in mid-June, returned to 4.45% yesterday. Long-term rates are tightening again without any clear trend. The 2-year rate is also tightening again but much less and this bearish steepening is dominated by flows. As the summer period is generally a little less liquid, there may be some investment opportunities if the 10-year continues its correction above 4.5%. In terms of bond strategy, it would be advisable to gradually abandon what we call “ephemeral pleasures”. These investments in money markets or bonds with very short maturities still offer returns above 5%, but not for very long. It is therefore a question of gradually putting duration back into portfolios.
