Today in the US it will be all equity market stories

Outlook

Today in the US it will be all equity market stories, all the time. On the data front, it’s the ISM services. We get the Reserve Bank of Australia overnight/tomorrow, with a sudden shift in perception from hawkish to maybe not quite so hawkish and perhaps a cut at the Dec meeting.  The forthright RBA may say some interesting things about current conditions.

As we write below, the labor market data is not bad as it looks but that doesn’t pass the “so what?” test. Once markets become hysterical and herd behavior takes over, correcting data misinterpretations is a fool’s journey. This is a crisis in which “normal” standards do not apply, including in the chart world. Things like overbought-oversold are no longer useful.

We have an interesting divergence in Big Bank viewpoints. As noted about, JP Morgan thinks the Fed waited too long and will panic, with Sept bringing a 50 bp cut, and November, too. The more level-headed Goldman Sachs now sees the odds of recession a tad higher from 10% to 25%, and 25 bp rate cuts in each of Sept, Nov and Dec. Goldman writes “The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks. If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

How bad is the labor report, anyway? The market overreacted to the jobs report on Friday. It wasn’t as bad as it seemed. Payrolls were mere 114,000 in July and the unemployment rate jumped  4.3%.

But also remember the unemployment rate is a function of those saying they are seeking a job (household survey) and that number rises when new entrants come into the market. More evidentiary of recession is layoffs/firings.

We don’t have July yet but in June, layoffs fell to 1,498,000 from 1,678,000 in May. Trading Economics says “The United States averaged 1919.79 Thousand from 2000 until 2024, reaching an all time high of 13516.00 Thousand in March of 2020 and a record low of 1287.00 Thousand in June of 2021.”

But back to the Sahm rule, which just rang the recession bell at 0.53. The rule states that if you subtract the current unemployment rate (4.3%) from the low over the past 12 months and it comes to 0.50 or more, you have a recession signal. The St. Louis Fed displays it (but not updated yet). The rule is also applied to the 3-mnth moving average.

But listen: Sahm herself says condition have been so peculiar lately—recovery from Covid, waves of immigrants joining the workforce but not getting jobs—that the rule might not be valid this time.

Economist Krugman, who is annoying but usually right, says this time it’s not the thing to watch. Better would be the NY Fed, which gets inflation at 2.06% (vs. the target of 2%). Goldman Sachs has been saying 2% is already here for several weeks. So, the real problem is not recession—it’s the Fed having waited too long. The standard “behind the curve” accusations will begin any minute.

Once the dust settles and prices retreat from hysteria, this is not bad news. Big Tech and AI aside, the stock market is supposed to like rate cuts. Smaller companies with debt and home buyers love ‘em. We see no reason (so far) for the next Atlanta Fed GDP to be down in the dumps. We get a new version tomorrow.

Finally, you have to question whether the Fed ever acts in panic mode. The talk of an “emergency’ rate cut is out of keeping with the staid and cautious central bank’s usual behavior. Even 50 bp in Sept would be a stretch. 

Forecast

Risk aversion is not a simple on-off. It can morph into panic and cross the equivalent of the blood-brain barrier, jumping from currencies (yen) to equities (Nikkei) and then beyond there. That takes us to the mystery of contagion. Aside from margin calls and carry-trades still to be unwound, the fall in the Nikkei should have a far lesser affect on the US indices. A collapse or at least a drop in the Big Seven has been building for some time, so the real trigger did not actually come from Japan, but rather from Mr. Buffertt, if we have to name names.

But this is a “never mind” moment. The US equity market wants to believe everything all at once—yen, Nikkei, overhyped AI, Big 7 overinvestment, recession, panicked Fed, etc. This is the madness of crowds and there is no amount of logic or data to break it up. The flight to bonds is sufficient evidence of pure panic. It’s possible that bottom-fishers can emerge early and break the contagion linage, whatever that is, but we shouldn’t count on it. In the meanwhile, the big winner is the safe-haven Swiss franc.

Now is the time to exit. Go to the beach, clean your desk, read a book. Do anything but trade. This is likely to get a lot worse before it gets better. 

Political Tidbit:  On Sunday, the pollster Nate Silver released this stunning statement: “Although the race is still a toss-up, Harris leads Trump by 1.4 points in our national polling average, and has a 51 percent chance of winning the electoral college.”

There are a dozen caveats, of course. Silver was the guy who devised the original model and while polls are not votes, is to be trusted as a statistician.

Predict It, with far fewer voices, has Harris at 53 cents and Trump at 49, down 1 cent in one day. Dyed-in-the-wool Republican Mish,  quoting various other Republican leaders, attributes the losses to foot-in-mouth disease, referring to Trump’s racist comments last week but going back to the 90-minute convention speech and narcissism as well as weird stuff like all the references to Hannibal Lecter.

And to drive home our point that the whole world cares about the US voter rejecting Trump, the FT now has a twice-weekly newsletter on the US election.

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