The time has come, and this is the end of an era (At least for me LOL)
This is the final IF The Shoe Fitz article (possibly ever) and I cannot thank everybody enough for their support over the years. I am very excited about the next stage in my career where I am sure I will still cross paths with many of you.
But my employment change is not the big event of the week. Tomorrow, we have the publication of the employment data for April, and it is possible that this could be a very important moment in terms of what the Fed does and when.
For the first time in this cycle, we have a danger where the total number of people unemployed (presently 7,083mm) crosses over with JOLTS (last 7,192 mm). Over time Jay has vacillated with what he thinks is important in the data (Michigan inflation expectations being a prime example) but he has never wavered from his comments that while the JOLTS/Total unemployed ratio has fallen sharply - it is still above 1.
So, for that to change would obviously be a big deal.
If we look back over the past year at times when JOLTS have printed 200k or more below the prior month first revision (April was 288k below the revised March number) on 4 of the 5 occasions NFP the following month has missed on the downside. That miss on average has been 53k with a range of minus 23k to minus 88k. So, it looks like a high probability we could see an NFP print below 100k tomorrow.
On the unemployment rate there is likely a low probability that we would once again trigger the SAHM rule albeit not impossible. That rule suggests that if the unemployment rate prints .5 above the low print of the prior 12 months, then the dangers of a recession mount. For that the unemployment rate would have to print 4.4%. Such a print would put us a full percentage point above the 3.4% trend low and a full 2 /10ths above the high posted so far of 4.2%. With the initial number for Q1 printing negative that bar is obviously not as high as it was not so long ago.
It is highly unlikely it will happen but what IF we saw crossover on the JOLTS/Total unemployed ratio AND we printed 4.4% on the unemployment rate AND NFP printed negative? All very unlikely for sure but as I always repeat - The only think that is unthinkable in markets and the economy today is that anything is unthinkable. The recent ADP number (62k) while not always a great guide is a warning in that respect as is today's initial claims at 241k and continuing claims at a new cycle high of 1,916k.
IF that were to happen then there is a very real danger that the Fed would be forced to shift course and ease next week. This is especially true as you are now getting heavyweights like Waller who are clearly looking at the impact of Smoot Hawley in 1929-1930. That clearly showed that Tit For tat tariffs that drag on for an extended period reduce Global trade, reduce global growth, increase unemployment and are at best disinflationary if not deflationary.
The reality is that it may be a bit too early and the real focus could be on the June meeting and the May employment data released 1 day before the blackout period on 6th June. The market is starting to sniff this out as evidenced by the steady move lower again in the US 2-year yield towards 3.5%.
Businesses are clearly frozen in terms of investment/capital expenditure and employment decisions and, as yet, nothing substantive has happened but a "plethora of fluff comments" to alleviate that uncertainty.
However, the most important point here is not May (Highly unlikely) or June (steadily coming into focus. The most important point is that while the Fed has signaled it is not (yet) ready it has also signaled that because they want to be sure they are waiting to move. The trade-off to this is that when they do decide to move it will not be 25 bp's.
The next ease by the Fed, when it comes, is going to be 50 bp's and I think that June is clearly a rising possibility. Increasingly, FWIW, I personally think the timeline for a cut is becoming more imminent.
If the numbers are as bad as noted above...then despite what they have been saying May is suddenly in play. IF the numbers are just weak...then June is in play. Either way I think a 50 bp's cut is coming again soon
What does that mean across markets?
US curves should steepen further. As it appears that at least for now the stresses of the swap/basis trades have abated that should be a bull steepener.
The USD looks back to trading relative yield differentials so what happens in other yield markets will factor in here. We have now had a good correction towards our short-term targets here (1.1260-80 on EURUSD and 145-145.50 on USDJPY so the USD could be susceptible to a weak number tomorrow
The Oil price likely remains under pressure while Gold should start to reassert itself again.
Equities will like the possible Fed shift on one side, but the trade-off will be the reason for the shift- It is not because of inflation but because of employment and the economy, which is a negative - a "behind the curve" shift. That suggests any equity market boost could be short-lived. We have already reached the 5,650-5,670 target, so an extension towards 5,837-5,852 could not be ruled out
This will all be a work in progress and a combination of pulling all the building blocks together. For that you will need a new builder.
For now, I will sign off not with a goodbye but an Au Revoir- (Until we see each other again) and a quote from the classic Hill Street Blues "Hey, let's be careful out there"
