Will You Get Fooled Again

By Michael Every of Rabobank

“There’s an old saying in Tennessee –I know it’s in Texas, probably in Tennessee– that says, fool me once, shame on – shame on you. Fool me – you can’t get fooled again.” – George W. Bush

Fed Chair Powell’s round-two testimony yesterday made it clear he has not made up his mind whether to go 25bps or 50bps this month. However, he also made it clear he was looking at the JOLTS data, payrolls, and CPI to tip the scales. If so, strike one for 50bps, because JOLTS came in significantly stronger than expected. Today sees weekly initial jobless claims, which have been stubbornly low for a long time, ahead of tomorrow’s key payrolls print, which the ADP number yesterday suggests might be another strong one too.

One can poke holes in the JOLTS data, and in ADP and payrolls, and maybe initial claims. Further afield, I mock Aussie jobs data; anyone dealing with the UK knows the iron pyrite-standard of its civil service today; New Zealand has such a small labor market that it’s easily distorted; Canada’s data are often odd; and Europe’s aren’t looked at as much by markets. However, to paraphrase an old adage, you can be fooled by some of the labour-market data all of the time, and by all of the labour-market data some of the time, but you can’t be fooled by all of the labour-market data all of the time. In short, there seems little likelihood all the US data could align, and be echoed in DM and EM economies at the same time, unless there was either a global confederacy of dunces, a global conspiracy, or a global trend of low unemployment and higher nominal wage growth.

Indeed, Bloomberg this morning carries a juicy snippet from the latest Fed Beige Book –which noted a moderation in price and wage pressures overall, but steady growth and hiring prospects against a very tight labour market– in which a Montana construction company found it cheaper to rent a jet to fly workers in to one of its plants than to hire locals, as another Montana firm reported “stupid” amounts of money were needed to bring in even entry-level hospitality staff.

That’s as the White House just proposed a 5.2% pay-rise for federal workers (and a 25% minimum tax hikes on billionaires that won’t pass the House ‘because billionaires’) on top of an 8.7% COLA increase for 70m Americans. If inflation is going to drop back to 2% this year, that’s not a bad pay or social security rise. If inflation isn’t going to drop back, the pressure will increase for more on wages, and 2024 COLA will rise automatically.

As a result, it isn’t the unemployment shoe that’s dropping (yet), but the market’s resistance to the previously-unthinkable idea of 6% Fed funds – which as Rabo’s Philip Marey points out, is still nothing in real terms compared to the serious US hiking cycles of the past. It’s a point worth stressing if you are looking at real wage growth and saying it is low, or real retail sales growth and saying it is too: well, so are real rates so far.

Even with US 2-year yields now being over 5%, if the Fed goes to 6%, markets are still pricing for the FOMC to cut 100bps again afterwards: but isn’t that the same playbook that’s made fools of markets so far? Elsewhere, the BOC yesterday, while not moving rates from 4.50%, so the first ‘big’ central bank to pause, said it’s still reassessing if more needs to be done.

Only time –and, before that, the next two big US data releases– will tell.

“We’ll be fighting in the streets; With our children at our feet; And the morals that they worship will be gone; And the men who spurred us on; Sit in judgment of all wrong; They decide and the shotgun sings the song; I’ll tip my hat to the new Constitution; Take a bow for the new revolution; Smile and grin at the change all around; Pick up my guitar and play; Just like yesterday; Then I’ll get on my knees and pray…. We don’t get fooled again” – The Who

Meanwhile, the global backdrop says geopolitical tensions and rates will be higher for longer.

The Netherlands has agreed to restrict its highest tech chip exports to China: so more “containment”.

Australia will buy 3-5 US Virginia class nuclear-powered submarines in the 2030s, followed by a new subs with UK designs and US tech, with huge spending to create an Aussie support supply chain for them. Moreover, a US sub will be regularly based in Australia from 2027, a date the CIA has noted in relation to Taiwan: so more “encirclement”.

After China’s foreign minister warning of “conflict” on that basis, Gideon Rachman argues in the Financial Times that the likeliest alternative to today’s tension is not kumbaya but war: and as China is not going away, the US would be better off with resolve and patience, leveraging allies, the global system, technology, and better demographics. (Which it is?)

Xi Jinping visited the PLA to stress the need to systematically upgrade its strength ahead of its centenary in 2027: his missive is “Be calm and maintain determination, seek progress through stability, actively achieve things, unite and dare to struggle”. The word ‘struggle’ can have some serious connotations in China: and recall 5% of central government roles are reportedly about to be cut to refocus that manpower on overcoming US “containment” and “encirclement”, which would be a remarkable action in any political economy.

Relatedly(?), China’s financial shake-up will apparently see pay cuts of 50% for its new financial regulators: common prosperity? If so, it’s a policy Wall Street will this time applaud… for everyone but themselves of course. Indeed, Bloomberg says graduate tech-driven traders in Sydney are earning $400,000 straight out of school. The RBA will be thrilled, as that is almost enough to afford a starter home there as mortgage rates soar.

“Only a fool trips on what is behind him.” – Iceberg Slim

Going back to being fooled by data, final Q4 Japanese GDP was slashed from +0.2% q-o-q to flat, or 0.8% annualized to just 0.1%. That makes the downward revision to Q4 Eurozone GDP look mild. The big difference appears to have been in measuring real vs nominal consumer spending: how topical.

Chinese CPI came in at 1.0% y-o-y vs. 1.9% expected, and PPI at -1.4% y-o-y vs. -1.3%. Suddenly there will be concerns over deflation in China. At the very least, rates there won’t be rising even as they do in the US: and yet some will still be bullish on CNY, or at least they were until recently. With whose money?