Bad Employment Data Causes Recession Fears To Spike

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the cliff-notes:

• Soft labor market data, with nonfarm payrolls at +114k (vs. +175k estimate) and unemployment at 4.3% (vs. 4.1% estimate), raised recession fears.
• The unemployment rate has already risen past the Fed's end-of-year targets for 2024 and 2025, and it's only August.
• Average hourly earnings dropped to 3.6% YoY from 3.9%, indicating wage disinflation and further confirmation of the deceleration in economic activity

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Recession fears have mounted in the two days since Powell's presser, with this morning's overly soft labor market data sealing the deal.

• Nonfarm Payrolls: +114k versus +175k estimate, -61k miss
• Unemployment Rate: 4.3% versus 4.1% estimate, +0.2% beat
• Average Hourly Earnings YoY: 3.6% down from 3.9% prior

So the number of people employed missed the street's estimates, the UNR came in way hotter than expected on a relative basis, and earnings decelerated by a wide margin from the prior month, and came in slightly below estimates.

This was an unbelievably soft labor market report. Now sure, the payroll miss and unemployment rate spike are partly due to the large hurricane the US just experienced, and those jobs will be back by next month's report. Still though, it's undeniable that the turn in the labor market is now just slowing linearly, but decelerating, and that is cause for concern for the Fed.

The Fed stated in Wednesday's minutes that it was shifting its focus to both sides of its dual mandate, meaning that the inflation mandate that they prioritized for the cycle up to this point is now of equal risk to the economy as the maximum employment mandate.

For a labor report to come in extremely soft only two days after Powell announces they are starting to think about it, many traders believe the Fed may be too late to the party with this one. The Fed's unemployment rate target for the end of 2024 was 4.2%

We've had many false starts to an economic downturn this cycle. Here is reason to believe that this one isn't:

• The labor market is loosening. The 4.1% unemployment rate is historically tame, but it’s a cycle high, which is now the focus of the Fed's dual mandate under Powell.
• Higher quality inflation: We're seeing services-based disinflation rather than goods-based. Most of the drop from the 9.1% high to 3% was due to goods disinflation. Now, we have outright goods deflation in some sectors and disinflation in services.

That is what the rates market says. This is the big one. Moves like this don't happen on false starts, they happen when the market is convinced of the economic trend.

The 2-year US Treasury (proxy for Fed rate expectations) are down 50 bps in 5 days, and 27-bps of that move came today!

Instead of 2-3 cuts by December, the market is now pricing in between 4 and 5 rate cuts from te Fed by December. Treasuries are pricing in recessionary rate cuts, not just the ones that the incremental 25-bps ones that the Fed has in its dot plot and are slated to start in September. This is much more substantial:

One key factor in the slowdown narrative is our federal deficit, currently at 5.5%. Deficit spending boosts aggregate demand by increasing government expenditures, which can spur economic growth, especially when the economy is underperforming. This has countered the ongoing labor market slowdown.

However, today's sharp decline in average hourly earnings signals that recessionary forces are overtaking the benefits of deficit spending. While deficit spending has delayed economic slowdown, the rising unemployment rate now makes a slowdown appear inevitable.

This shift will likely reinforce bearish sentiment, drive yields down (which is already underway) as investors flock to US Treasuries, and eventually turn the stock market bearish as earnings are impacted by the emerging economic downturn.

The recession trade is just now beginning, maybe the deficit will cause it to be another false start, or maybe this time, it won't:

Final thought: every day is a generational bitcoin buying opportunity.

Take it easy,

Joe Consorti

Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.

Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.

Download Theya on the App Store.