Sive Morten
Special Consultant to the FPA
- Messages
- 19,276
Fundamentals
No doubts, J Powell speech was important this week. But we suggest that job market data revision was even more important. The major question that is raising - how more a kind of "revisions" could come on the surface in nearest time? And it means that other data, such as inflation could be revised also. But, the Fed was making decisions about the rate and economy conditions by this data, wasn't it? So, doesn't it mean that those decisions and conclusions had nothing to reality? It seems so.
Also consider that this fake swims up right in the moment when the Fed policy is expected to change, it was matched to the Fed decision. And previously, it was matched to previous decisions? So, tail wags the dog?
BLS, FED and other stuff
So this week saw one of the largest-ever revisions of statistics in the United States. Moreover, it occurred in labor statistics, which, as we have repeatedly noted (and not only we did), is very muchfalsified adjusted. At the end of spring, we wrote that there was data on the distortion of inflation (an article by the Summers group) and the labor market. Employees of one of the reserve banks found that, most likely, the Bureau of Labor Statistics (BLS) "drew" a fairly large number of jobs (from 800,000 to 1,300,000). We wrote about it in March seemingly. Note that this does not mean that they have not drawn somewhere else, the question concerns only one local issue.
Generally speaking, the BLS annually reviews data on the labor market (modification of methodology or clarification of data) and usually everything fits within the limits of statistical error (range from minus 500 thousand to plus 500 thousand over the past 10 years, and on average minus 100-200 thousand people were employed). This time, the result was serious, but, its a miracle - it surprisingly coincided with the results of an earlier study. Namely, the negative revision amounted to 818 thousand, which, of course, is comparable to the record revision in 2009, but it is painfully similar to the research of reserve bankers. However, the lower range of their assessment.
By the way, it is -68K people employed per month, or almost a one third of the average monthly increase in 2023. All these jobs just disappeared, there is no doubt that they were just painted from scratch. And these data show that the entire statistical picture, on the basis of which the legend of the stability and success of the American economy is being built, is crumbling to dust. At the same time, we remind you that there are no guarantees that someone else will not find the same number of painted jobs somewhere else. In general, the picture is very revealing.
It was no same revision for inflation by far. And if you make it? Not just we but many other analysts show that inflation is much higher than official data and even the estimates of the Summers group. And the data was repeatedly provided. In fact official CPI numbers show more or less acceptable inflation level due to couple numbers - energy prices that artificially controlled via SPR and used car and trucks that have dropped in price for 10%+. That's all. Other rows shows official (!) inflation around 5% on average. Besides, many most inflationary components just excluded from calculation, like coffee, for example. Orange juice, it has tripled in the last 2 years, so it also will be excluded?
With Summers' assessment, we get a continuous decline in the American economy since the fall of 2021. And the world, of course .But even with official inflation, with its figures of 3%, the US economy is frankly sagging. How they manage not to show a decline despite the fact that almost all regional reserve banks provide it at home is a separate question. Statisticians will be interested in it, but our readers will not be very interested. But there are a whole bunch of unexpected indicators that indicate that things are not very good. For example, an assessment of labor productivity growth in the United States. According to their own official data. Productivity is not raising, could I ask where GDP growth comes from? Indirectly it is confirmed by flat energy consumption in the US. Previously we also showed this chart. So GDP numbers are also look doubtful.
It is even more interesting, where stock market growth comes from. Operational Cash Flow (OCF), or Free Cash Flow that stands in purpose of the company after all expenses and revenues is dropping. Adjusted for inflation, the collapse by 9.3% YoY and -7.8% in two years, which is the worst dynamics since the 2009 crisis. And this is with official inflation figures... Now you could make reasonable conclusion about growth nature of the US stock market. Besides, Investors' risk appetite has fallen sharply, according to S&P Global, but stock market is still growing...
Now US stock market chart shows uncanny resemblance 2008 year. The crowd mind is an absolute category that always works, but some analysts suggest that it will be a bit different, not 2008 scenario, because of the mind of professional traders. As their amount has increased in multiple times, they could set the shape of coming collapse:
I don't want to say anything more ... its extremely interesting. Well, in general, September - isn't it too early to drop it all right now? I would rather think about February or March next year. But we will see. This is just a detail, the core remains the same - the US economy problems are turning public. It is impossible to hide them anymore. In fact an unemployment is significantly higher, which means that recession by official data (!!!) started in March 2024? Just to close employment topic, here is another interesting thing. Previously we already have mentioned Sahm indicator, that recognizes recessions. Here is a perfected version, called Michaillat-Saez indicator. Now it stands between possible and sure recession around 0.4 level:
Two American economists have combined data on job openings and unemployment to produce a more accurate indicator of the start of a recession in the United States. According to their calculations, there is a 67% chance that a recession has already begun in March 2024 [Sahm Rule worked in July]. According to a research paper, the new indicator detects recessions even earlier than Claudia Sahm's rule - 1.4 months after its onset versus 2.6 months. Moreover, it has been working flawlessly since 1930, while the Sahm Rule has only been working since 1960.
Speaking about timing of the rate cut - the Fed is late. Although we've missed with July rate cut by fact - we were right by core. Besides, now situation shows that cut should have to happen even earlier...
Other US stuff to mention
Busiest US ports absorb surge in imports approaching pandemic-era rush. Ports of Los Angeles and Long Beach Record 3rd-Highest record monthly imports in July, just short of May 2021, when major disruptions to onshore logistics began. Now companies are stocking up again amid concerns about tariffs and dockers' strikes.
As we have previously found out, the depicted growth of US GDP in Q2 was largely due to the warehouse stock indicator. It turns out that the overstocking continues - with acceleration in July-August and creates new risks. Everything would be fine, but this process is taking place against the backdrop of weakening consumption. Real retail sales are falling, and problems in the labor market can no longer be hidden. What will happen in the fall when businesses realize that the goods they purchased simply cannot be bought by anyone? Total US household credit and debit card spending fell 1% y/y in week ended Aug. 10 according to BofA:
Because of the glut, they will lower prices, which will push consumer inflation down. The Fed will take a breather and lower the rate, and business will lose its profits due to the price cuts, while also laying off a couple hundred thousand more people. Why? Because after the holiday season in August, there should be a jump. But since the consumer is not strong, it will not follow. But those in the know understand that the response to the recession will be inflationary.
Grand Dame Europe
As it is more or less clear situation with the Fed, final point we discuss below, in conclusion section, the ECB comes on 1st stage. Because dynamic of the EUR now at 90% depends on its rate decision. Market in general sure that ECB will cut the rate in September again. But personally, I do not have such a confidence.
Indeed, Euro zone negotiated wage growth slowed last quarter, bolstering the case for another interest rate cut in September and assuaging policymakers' fears that runaway labour costs would continue to put upward pressure on inflation. Growth in negotiated wages slowed to 3.55% in the second quarter from 4.74% three months earlier, primarily because of a major slowdown in Germany, the bloc's biggest economy, data from the European Central Bank showed on Thursday.
This economic weakness is why Finnish policymaker Olli Rehn has already made the case for a rate cut next month and why the German central bank said that a long expected recovery is likely to be delayed yet again.
While wage growth remains above levels consistent with a 2% inflation target, ECB chief economist Philip Lane has appeared relaxed about this. He has argued that already-concluded wage deals lock in a further slowdown in the quarters ahead and, in any case, wages are still catching up after rapid inflation over the past four years eroded workers' purchasing power.
Still, we have a pretty much time until ECB rate decision on 12 of September. Next week we should get another bulk of data - EU inflation. It comes on Friday next week. Any upside surprises may warrant caution, as traders have ramped up ECB rate cut bets in recent weeks.
Now I would say, situation stands 50/50, mostly because wage inflation is decreasing. Germany has awful situation, including recent PMI data. But because of situation with wage inflation just is started normalizing and the Fed will cut the rate at least for 25 points anyway, ECB seems a king of situation and could decide to not hurry up and keep rate at the same level for another month. Besides, compares to the Fed - ECB has pause in November. So, in October they will not have any headache and just cut the rate as it is anticipated. But this will let them to keep wage inflation under pressure a bit more. So, my personal opinion that ECB could hold the rate untouched, especially if we get higher or flat CPI data for August next week.
YEN PROBLEM IS NOT RESOLVED
Although this topic is moved off the screens in recent two weeks, it doesn't mean that it is resolved. Here we have two important things. First is, Citigroup Inc. says the carry trade is back, but with a key difference: Hedge funds are borrowing U.S. dollars, not yen.
Second is, BOJ Governor Kazuo Ueda told parliament that while the BOJ will keep an eye out on the fallout from unstable markets, it will continue to hike rates if inflation remains on track to durably hit its 2% target. BOJ's rate hike path is full of uncertainty as Japan swims against the global rate-cut tide, which could leave its currency and stock prices susceptible to wild swings. A latest poll by Reuters showed a majority of economists expect the BOJ to hike rates again this year, but more see the chance of it happening in December rather than October.
Combination of these two factors makes overall situation more dangerous. If Yen in carry portfolios are replaced by dollar, or better to say - investors deny using JPY to invest in US assets and use USD directly, expecting epic rate cut from the Fed, the JPY strength could accelerate due toe-to-toe policies of BoJ and the Fed. As we've explained last week, no carry positions have been closed yet and they are all still in place. This factor still could become the trigger of US market collapse and additional bearish factor for US Dollar.
CONCLUSION:
In general, guys everything goes with our plan. A few weeks ago we said that the US rate policy and the Fed is taking backseat, because it has become clear that the US just can't afford to keep high rates. So, this topic temporally is off the table andThe Eye of the Sauron turns to ECB and geopolitics. Next big driver for the EUR will be ECB decision. Because the fact of rate change is important per se, and second is, because this time ECB has the session prior to the Fed one. Let's keep an eye on EU inflation data next week, as it will be the last hint. As we said last week - if ECB will hold rate intact, the Fed probably will cut just for 25 points. This is our central scenario by far. If, still ECB will cut for 25 points, chances that the Fed could cut for 50 at once will increase. This will be the hidden boost factor for EUR. But no rate cut from ECB also could bring a lot of noise and push EUR higher because it is not expected. Whatever will happen, EUR should keep positive sentiment till the end of the year, although the speed of its action might be different. US Dollar stands under pressure - as political due to elections as economical because of the Fed and its nervousness around rate policy.
Speaking about political pressure. Kamala & Co finally decided to release the brakes this week: 28% corporate tax, 44.6% capital gains tax [this actually makes any speculative trading unprofitable] and 25% tax on unrealized income for the "rich". And against this background, it is not surprising that now any of the candidates is a de facto confirmed state strategy of a “ weak dollar.”
Note that the dollar index has fallen to a 5-month low. There is only one long-term path for DXY - to the south. This is not a viable scenario for the economy in the medium term, as the trade deficit will grow. Of course, there are other interesting options: a default on government debt, a collapse of the Treasury market by foreign holders, or a sudden maintenance of high interest rates by the regulator [a collapse of everything].
The dollar is vulnerable to a possible faster Fed rate cut because the only thing keeping the dollar relatively strong is capital inflows and that is one of the factors that keeps the Fed from moving too fast relative to others. So, even in most weak scenario when the Fed and ECB will cut for 25 points both, EUR should stay on the surface. That's why we keep long-term bullish view by far for EUR/USD.
No doubts, J Powell speech was important this week. But we suggest that job market data revision was even more important. The major question that is raising - how more a kind of "revisions" could come on the surface in nearest time? And it means that other data, such as inflation could be revised also. But, the Fed was making decisions about the rate and economy conditions by this data, wasn't it? So, doesn't it mean that those decisions and conclusions had nothing to reality? It seems so.
Also consider that this fake swims up right in the moment when the Fed policy is expected to change, it was matched to the Fed decision. And previously, it was matched to previous decisions? So, tail wags the dog?
BLS, FED and other stuff
So this week saw one of the largest-ever revisions of statistics in the United States. Moreover, it occurred in labor statistics, which, as we have repeatedly noted (and not only we did), is very much
Generally speaking, the BLS annually reviews data on the labor market (modification of methodology or clarification of data) and usually everything fits within the limits of statistical error (range from minus 500 thousand to plus 500 thousand over the past 10 years, and on average minus 100-200 thousand people were employed). This time, the result was serious, but, its a miracle - it surprisingly coincided with the results of an earlier study. Namely, the negative revision amounted to 818 thousand, which, of course, is comparable to the record revision in 2009, but it is painfully similar to the research of reserve bankers. However, the lower range of their assessment.
By the way, it is -68K people employed per month, or almost a one third of the average monthly increase in 2023. All these jobs just disappeared, there is no doubt that they were just painted from scratch. And these data show that the entire statistical picture, on the basis of which the legend of the stability and success of the American economy is being built, is crumbling to dust. At the same time, we remind you that there are no guarantees that someone else will not find the same number of painted jobs somewhere else. In general, the picture is very revealing.
It was no same revision for inflation by far. And if you make it? Not just we but many other analysts show that inflation is much higher than official data and even the estimates of the Summers group. And the data was repeatedly provided. In fact official CPI numbers show more or less acceptable inflation level due to couple numbers - energy prices that artificially controlled via SPR and used car and trucks that have dropped in price for 10%+. That's all. Other rows shows official (!) inflation around 5% on average. Besides, many most inflationary components just excluded from calculation, like coffee, for example. Orange juice, it has tripled in the last 2 years, so it also will be excluded?
With Summers' assessment, we get a continuous decline in the American economy since the fall of 2021. And the world, of course .But even with official inflation, with its figures of 3%, the US economy is frankly sagging. How they manage not to show a decline despite the fact that almost all regional reserve banks provide it at home is a separate question. Statisticians will be interested in it, but our readers will not be very interested. But there are a whole bunch of unexpected indicators that indicate that things are not very good. For example, an assessment of labor productivity growth in the United States. According to their own official data. Productivity is not raising, could I ask where GDP growth comes from? Indirectly it is confirmed by flat energy consumption in the US. Previously we also showed this chart. So GDP numbers are also look doubtful.
It is even more interesting, where stock market growth comes from. Operational Cash Flow (OCF), or Free Cash Flow that stands in purpose of the company after all expenses and revenues is dropping. Adjusted for inflation, the collapse by 9.3% YoY and -7.8% in two years, which is the worst dynamics since the 2009 crisis. And this is with official inflation figures... Now you could make reasonable conclusion about growth nature of the US stock market. Besides, Investors' risk appetite has fallen sharply, according to S&P Global, but stock market is still growing...
Now US stock market chart shows uncanny resemblance 2008 year. The crowd mind is an absolute category that always works, but some analysts suggest that it will be a bit different, not 2008 scenario, because of the mind of professional traders. As their amount has increased in multiple times, they could set the shape of coming collapse:
I don't want to say anything more ... its extremely interesting. Well, in general, September - isn't it too early to drop it all right now? I would rather think about February or March next year. But we will see. This is just a detail, the core remains the same - the US economy problems are turning public. It is impossible to hide them anymore. In fact an unemployment is significantly higher, which means that recession by official data (!!!) started in March 2024? Just to close employment topic, here is another interesting thing. Previously we already have mentioned Sahm indicator, that recognizes recessions. Here is a perfected version, called Michaillat-Saez indicator. Now it stands between possible and sure recession around 0.4 level:
Two American economists have combined data on job openings and unemployment to produce a more accurate indicator of the start of a recession in the United States. According to their calculations, there is a 67% chance that a recession has already begun in March 2024 [Sahm Rule worked in July]. According to a research paper, the new indicator detects recessions even earlier than Claudia Sahm's rule - 1.4 months after its onset versus 2.6 months. Moreover, it has been working flawlessly since 1930, while the Sahm Rule has only been working since 1960.
Speaking about timing of the rate cut - the Fed is late. Although we've missed with July rate cut by fact - we were right by core. Besides, now situation shows that cut should have to happen even earlier...
Other US stuff to mention
Busiest US ports absorb surge in imports approaching pandemic-era rush. Ports of Los Angeles and Long Beach Record 3rd-Highest record monthly imports in July, just short of May 2021, when major disruptions to onshore logistics began. Now companies are stocking up again amid concerns about tariffs and dockers' strikes.
As we have previously found out, the depicted growth of US GDP in Q2 was largely due to the warehouse stock indicator. It turns out that the overstocking continues - with acceleration in July-August and creates new risks. Everything would be fine, but this process is taking place against the backdrop of weakening consumption. Real retail sales are falling, and problems in the labor market can no longer be hidden. What will happen in the fall when businesses realize that the goods they purchased simply cannot be bought by anyone? Total US household credit and debit card spending fell 1% y/y in week ended Aug. 10 according to BofA:
Because of the glut, they will lower prices, which will push consumer inflation down. The Fed will take a breather and lower the rate, and business will lose its profits due to the price cuts, while also laying off a couple hundred thousand more people. Why? Because after the holiday season in August, there should be a jump. But since the consumer is not strong, it will not follow. But those in the know understand that the response to the recession will be inflationary.
Grand Dame Europe
As it is more or less clear situation with the Fed, final point we discuss below, in conclusion section, the ECB comes on 1st stage. Because dynamic of the EUR now at 90% depends on its rate decision. Market in general sure that ECB will cut the rate in September again. But personally, I do not have such a confidence.
Indeed, Euro zone negotiated wage growth slowed last quarter, bolstering the case for another interest rate cut in September and assuaging policymakers' fears that runaway labour costs would continue to put upward pressure on inflation. Growth in negotiated wages slowed to 3.55% in the second quarter from 4.74% three months earlier, primarily because of a major slowdown in Germany, the bloc's biggest economy, data from the European Central Bank showed on Thursday.
This economic weakness is why Finnish policymaker Olli Rehn has already made the case for a rate cut next month and why the German central bank said that a long expected recovery is likely to be delayed yet again.
While wage growth remains above levels consistent with a 2% inflation target, ECB chief economist Philip Lane has appeared relaxed about this. He has argued that already-concluded wage deals lock in a further slowdown in the quarters ahead and, in any case, wages are still catching up after rapid inflation over the past four years eroded workers' purchasing power.
Still, we have a pretty much time until ECB rate decision on 12 of September. Next week we should get another bulk of data - EU inflation. It comes on Friday next week. Any upside surprises may warrant caution, as traders have ramped up ECB rate cut bets in recent weeks.
Now I would say, situation stands 50/50, mostly because wage inflation is decreasing. Germany has awful situation, including recent PMI data. But because of situation with wage inflation just is started normalizing and the Fed will cut the rate at least for 25 points anyway, ECB seems a king of situation and could decide to not hurry up and keep rate at the same level for another month. Besides, compares to the Fed - ECB has pause in November. So, in October they will not have any headache and just cut the rate as it is anticipated. But this will let them to keep wage inflation under pressure a bit more. So, my personal opinion that ECB could hold the rate untouched, especially if we get higher or flat CPI data for August next week.
YEN PROBLEM IS NOT RESOLVED
Although this topic is moved off the screens in recent two weeks, it doesn't mean that it is resolved. Here we have two important things. First is, Citigroup Inc. says the carry trade is back, but with a key difference: Hedge funds are borrowing U.S. dollars, not yen.
Second is, BOJ Governor Kazuo Ueda told parliament that while the BOJ will keep an eye out on the fallout from unstable markets, it will continue to hike rates if inflation remains on track to durably hit its 2% target. BOJ's rate hike path is full of uncertainty as Japan swims against the global rate-cut tide, which could leave its currency and stock prices susceptible to wild swings. A latest poll by Reuters showed a majority of economists expect the BOJ to hike rates again this year, but more see the chance of it happening in December rather than October.
Combination of these two factors makes overall situation more dangerous. If Yen in carry portfolios are replaced by dollar, or better to say - investors deny using JPY to invest in US assets and use USD directly, expecting epic rate cut from the Fed, the JPY strength could accelerate due toe-to-toe policies of BoJ and the Fed. As we've explained last week, no carry positions have been closed yet and they are all still in place. This factor still could become the trigger of US market collapse and additional bearish factor for US Dollar.
CONCLUSION:
In general, guys everything goes with our plan. A few weeks ago we said that the US rate policy and the Fed is taking backseat, because it has become clear that the US just can't afford to keep high rates. So, this topic temporally is off the table and
Speaking about political pressure. Kamala & Co finally decided to release the brakes this week: 28% corporate tax, 44.6% capital gains tax [this actually makes any speculative trading unprofitable] and 25% tax on unrealized income for the "rich". And against this background, it is not surprising that now any of the candidates is a de facto confirmed state strategy of a “ weak dollar.”
Note that the dollar index has fallen to a 5-month low. There is only one long-term path for DXY - to the south. This is not a viable scenario for the economy in the medium term, as the trade deficit will grow. Of course, there are other interesting options: a default on government debt, a collapse of the Treasury market by foreign holders, or a sudden maintenance of high interest rates by the regulator [a collapse of everything].
The dollar is vulnerable to a possible faster Fed rate cut because the only thing keeping the dollar relatively strong is capital inflows and that is one of the factors that keeps the Fed from moving too fast relative to others. So, even in most weak scenario when the Fed and ECB will cut for 25 points both, EUR should stay on the surface. That's why we keep long-term bullish view by far for EUR/USD.
