Overview
The unemployment rate rose to 3.7% as more job-seekers entered the market, with the economy creating an estimated 315,000 jobs in August, in line with expectations. However, job creation estimates for the prior two months were revised downward by 107,000. In addition, hourly earnings increased at a 5.2% annual rate, a bit slower than expected. So overall, a slight moderation in the employment data.
The Fed wants to slow the economy and even break it. So I expect a 75-bps move at the September 20-21 FOMC meeting.
The rising rates and balance sheet roll-offs (quantitative tightening) will rapidly withdraw liquidity, gradually taking a toll on economic activity.
We are just 0.5% below Sahm’s Rule for marking the onset of recessions even as the Conference Board’s LEI nears a recession signal.
As usual, we should await incoming data but hold on tight.
Key Question
Are we heading into a recession? I reread the Powell speech at Jackson Hole. I was struck by how he closed: “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.” I will analyze Powell’s speech in greater detail below.
Performance Review
The selloff quickly pushed the S&P-500 into a crucial support zone we marked last week. The net/bull bear balance is below -60, so the path of least resistance is lower.
A retest of the June lows will be inevitable if the market breaks through this support zone. In addition, the all-important CPI report is due on the 13th, a week before the FOMC meeting. So buckle up.
Fasten Your Seat Belt
Chair Powell’s speech at Jackson Hole last week shows that he wants to avoid a rerun of the 1970s-style runaway inflation. He has concluded that following the Volcker model, he must break the economy via a “lengthy period of very restrictive monetary policy.” He aims to push headline PCE inflation below 2% (currently at 6.3%) by “taking forceful and rapid steps to moderate demand.”
Chair Powell hopes to get away with merely a lengthy (rather than very lengthy) period of restrictive monetary policy. I interpret “lengthy period” as two years, so say through March 2024 (“We will keep at it until we are confident the job is done”). Of course, the Fed and the markets will remain data-dependent, so the actual duration of the “lengthy period” is hard to predict. The beauty of Fed Speak is that it is difficult to pin down. Here is my summary.
I had anticipated this move in June and have shown a detailed analysis of 1970s FOMC policy, inflation, and GDP. That analysis notes that factors well beyond the Fed’s control, such as China’s COVID-19 lockdowns (and their supply chain impacts), the war in Ukraine (and its effect on inflation), and rental costs, are driving inflation indexes.
Claudia Sahm’s Rule specifies that we have a recession when the “three-month average national unemployment rate rises by at least 0.50 percentage points relative to its low in the previous 12 months.” As the chart at the top of this post shows, we are still 0.5% below the Sahm threshold.
The Conference Board Index of Leading Economic Indicators (LEI) is on the verge of a recession signal. Their nice flow chart of recession possibilities is worth a look. The year-over-year change in the LEI is still positive, but only just so. The last two recessions occurred with the y-o-y change in LEI below -5%. The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.
Traders have not seen such an aggressive Fed since the early 1980s, so we should expect sluggish bull moves combined with rapid bear swings as they try to understand the Fed. First, of course, we have to get through the election and sort through incoming data. Then, once the Fed fund rate plateaus, the market will feel better, and we will have to reassess. Hence, I expect the PCE inflation to be lower at the 2023 Jackson Hole meeting.
Where the Trends Are
I ranked the over 3000 US ETFs using MetaStock and the Chande Trend Meter. The top-ranked US dollar ETF (UUP) broke to new highs this week, and the rest are precious metals or bear ETFs for indexes or bonds.
Wrap-up
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Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, and entertainment, not for investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.