hello my friends today is August 24th and this is Markets weekly so this week another good week in markets it looks like the major indexes are just slightly below all-time highs is this going to be a double top or are we just going to break through and zoom on to infinity and beyond I have no idea we'll find out in the coming weeks but it looks like we're at a pretty interesting juncture today I want to talk about three things first of course we have to talk about what happened at Jackson Hall where chair Powell officially pivoted towards a rate cutting regime let's hear what he said secondly what stood out to me the most the past week was the US dollar just relentlessly relentlessly sold across uh major current against major currencies let's talk about what could be driving that and what that might mean and lastly on the economic news front the big news last week was the down W Revision in US jobs created by about 800,000 that's a very big downward revision let's talk about what could be driving that and Ponder whether or not that's politically motivated all right starting with Jackson Hall now for some context Jackson Hall is a very very beautiful place in the state of Wyoming and every year Central Bankers around the world fly over there and basically have a big party uh often times at those events they have also very important policy oriented speeches a couple years ago Cher Powell was at Jackson Hall and he gave the speech saying that there would be some pain he was going to hike rates a lot probably cause a recession and he was going to bring inflation down now this week's Chow though was basically the opposite of the Chow a couple years ago let's hear what he said the upside risks to inflation have diminished and the downside risks to employment have increased as we highlighted in our last fomc statement we are attentive to the risks to both sides of our dual mandate the time has come for policy to adjust the direction of travel is clear and the timing and pace of rate Cuts will depend on incoming data the evolving Outlook and the balance of risks so the time has come he is telling everyone unambiguously that he's going to be cutting rates at the next meeting and how much he's going to cut and to what extent it's going to be data dependent let's think about what brought him here now a couple years ago inflation was very high but over the past few months has come down a lot the fed's favorite measure of inflation pce is about 2. 7% so you know that's just a little bit above the fed's target chair Paul has been saying over the past few meetings that he wanted to have more confidence that inflation was get getting to 2% today he said that he had that confidence what he's thinking about right now though is not so much inflation which he thinks is going to get to 2% what he's thinking about is the labor market now the labor market the unemployment rate was at multi- deade lows not too long ago but the unemployment rate has been taking up up steadily and is now around 4. 3% one of the notable quotes in his speech was that chal felt that the labor market today was actually weaker than it was in 2019 so that is a clear signal that between his two mandates Full Employment and price stability he's becoming more concerned about Full Employment and so he's going to Pivot now the market of course has known this for some time well I I'll say this so there are different markets you have equities you have rates you have Commodities you have FX now every Market has different people involved in it and so and they have different degrees of awareness of how the Fed works and how other regions work now the people who are most focused on the FED are the short-term interest rate Traders stir Traders for short these guys well they bet basically what the FED would do over the coming meetings so they're very attuned to how the FED is thinking now heading into this meeting the short-term interest rate Futures were already pricing in uh Cuts in September and about a 100 basis points of cuts for for the rest of the year now this speech did not have a big impact on them they marginally priced in a little bit more Cuts throughout the year uh but became more sure that we would get 25 basis points in September some possibility of 50 basis points the stir community of people like myself who have been telling you for some time the FED is going to cut in September we already knew this but it seems like the other markets were not as aware and so we had pretty notable moves in response to Jackson hle Equity markets obviously up a lot equities like rate Cuts uh notably though the dollar sold off significantly the thinking of course was that as the FED lowest rates uh interest rate differentials between the US and the rest of the world narrow and so the sold off the dollar sells off now it's unclear just how much rate Cuts we will get throughout the year I continue to think that we probably get 25 uh per meeting for 75 total but that's going to be completely data dependent since the FED has openly told us that they're more concerned about unemployment right now the jobs market reports we get each month will be more important than the inflation reads so all focused will be on uh the September jobs report number that we get the first week of September where if we have continuing rise in unemployment I think we could very likely get 50 basis points in September but if unemployment rate stays around 4.
3% or even improves uh which to know many people who want watch this think that last month's rise in the unemployment rate was maybe a fluke in any case if unemployment rate stabilizes I think we get 25 basis points and uh we'll just have to see honestly I don't think the FED knows they are really data dependent some other fed speakers at Jackson Hall were articulating a framework of being uh steady and measured in their Cuts so that's really other fed officials trying to Lobby everyone else as to what if F will do no one knows we'll have to wait for the data okay the second thing that I thought was really noteworthy of the past week was just the Relentless weakening of the US dollar now if you look at the US dollar Index zoom out a bit you'll notice that we're coming basically to the lower uh lower ranges now about 100 which in the past has been support now looking deeper against dollar crosses you can see Euro USD basically surging going to the Moon uh dollar against pound also surging going to the moon so there's been very strong selling of the dollar over the past few weeks and I'm kind of scratching my head a little bit uh because when I look at typical indicators of currency strength it doesn't stand out to me why the dollar would be selling off so much now typically people think well currencies are determined by interest rate differentials so let's look at the 2-year yields of say the US of uh Germany of the UK and see how things have been going well obviously the US is cutting rates and so the 2-year yield is lower uh than the overnight rate but if you notice what other countries are doing they're also cutting rates as well so even though rates we are in a rate cutting cycle in the US so as everyone else so the interest rate differentials when you look at a two to the two-year segment uh not really uh not really changing all that much doesn't seem that would justify the tremendous dollar weakness I think some people whisper that uh US inflation is dis US inflation is coming down so Us's disinflation is more than other countries and maybe that plays into a role but I'm not too sure if currencies trade on real rates rather than nominal rates another way people look at currencies is basically through economic growth oftentimes countries that have strong economic growth see their currencies appreciate as investors pour into the country to try to invest now when you look at economic growth comparing the US with other countries it's really clear that the US uh is doing a lot better in fact many other countries Euro Zone in particular have been doing very poorly so it's strange looking at growth rate differentials to ponder why the dollar would be selling off so much um it could simply be just U momentum a lot of ctas seeing that the dollar is weakening and piling in but I I think it's a it's an interesting thing that stood out to me now if the dollar continues to sell off I think this would be quite negative for all dollar assets the reason being as we've discussed before and I've written about in my blog is that there are many many foreign investors in US assets US capital markets the deepest in the world uh us uh has a lot of really cool stuff like technology AI you don't really have any uh Cutting Edge AI stuff in other countries so a lot of foreign investors have been pouring in and buying us Assets Now they can hedge their currency exposure but FX hedging has been pretty expensive the past few years so these guys are likely unhedged now even though they're making money on their say equities or their treasury Investments they're losing money on their currency Investments and they've been losing a lot because the dollar has been depreciating a lot now on the margins I would imagine that this could cause some foreign investors because of course um they're having losses to sell out of their us equities or other treasuries and go back home basically a blow up of the current carry trade that we saw similar to um earlier in the month so I think that's a notable risk right now uh if the dollar continues to depreciate and reason for for caution the US you know honestly is a huge huge huge source of um uh destination for foreign investment and so uh there there's a lot of potential selling that could happen all right the last thing that I want to talk about is the ginormous ginormous downward Revision in jobs created so the way that the jobs data works for the US every month as we all know we have uh the non- forign payrolls report where the bank uh the Bureau of Labor Statistics the BLS goes and they surveys a lot of 119,000 companies accounting for about a third of all the jobs uh in the US now they survey they don't survey everyone they take assist they survey just a third instead of everyone uh obviously it's a statistical sample and based on that survey of 119,000 uh employers they come up with an estimate as to how many jobs were created or lost each month now obviously this is just a sample and every now and then you have to update The Motto to make sure that uh what you're sampling continues to be representative of uh the economy as a whole now these updates come in the form of these uh Benchmark revisions where instead of sampling the 119,000 they take the time and go through the state level unemployment claims and Survey like about 95% of all the jobs created of all the Employers in the US to get a better sense as as to what's happening in the labor market now we got this new Benchmark revision last week and it shows that uh the non-foreign pays report has been overing jobs created by about 800,000 and that's you know huge right so labor market is not as strong as people thought that it was now people who study this seem to think that a big reason for uh the overstatement of jobs has been What's called the birth death model so again these government agencies are trying to estimate how many jobs are created each month however they know that sometimes a company is just let's say you start a company this month and you hire people but there's a lag between when that hire when that new company shows up in the data and when they initially hired people so to account for that lag they have something called the birth death model which refers not to people uh but to firms let's say the creation of firms and the death of firms MMS now that model appears to have been overestimating uh the amount of jobs created uh that is to say the amount of new businesses created that are hiring people over the past year and that model I think has been having trouble estimating it because during the pandemic we had a kind of a surge of Entrepreneurship where a lot of people created new businesses and now that surge in entrepreneurship probably petered down and so the motto is having trouble adjusting to just what kind of the uh regime there is when it comes to the founding of new firms and so that resulted in a significant overestimation of the jobs number now this could have played into uh some consideration when the FED is thinking about whether or not to cut rates labor market is not as strong as it as it um as they thought but to be clear fed officials have been suspecting this already from the FED minutes we got the last week it said that many fed officials were thinking that maybe the jobs number is overstated so I'm not sure if this number had too big of impact since they were already suspecting this now many people have also been pondering whether or not the BLS is in conuts with the Biden Administration and trying to pump up the chances of a Harris presidency now to be clear I have no idea but I'll make a couple observations now government obviously run by people people obviously have their own personal views their biases now we know for example that former president of the New York fed uh Bill Dudley very very strongly uh had a preference against Trump and so far was writing op-eds recommending that the FED conduct policy in a way to uh make sure that Trump Is Not Elected was not elected in 2020 is it the same in the BLS I don't know but usually though when you have these really really high stakes uh issues of course the presidency the ultimate Ultimate Prize there's a lot of interest involved and that oftentimes incentivizes people to act in certain ways so it's possible I don't know now the second thing that I would observe is that many people say that well let's say that the BLS was conspiring to pump up the economy why would they just uh recently announced right before November that they actually had to revise away 800,000 jobs right that doesn't make any sense now that's totally reasonable but I would point to the Market's reaction to tell you why it it's actually still makes sense because the market did not care at all about the 800,000 down revision the market only cares about what happens every month so if you were to overstate the job numbers every month the market would would would like that right but let's say later on you revise those jobs away the market doesn't care and so um from let's say from the market standpoint it would still make sense to overstate jobs only to re wise them away simply because the market doesn't care about revisions so again no idea if this is happening but just pointing out that it's possible all right so that's all I've prepared for today thanks so much for tuning in uh remember to like And subscribe and if you're interested in my thoughts check out my blog at fed guu. vn check out my online courses at Central Banking 101.
