Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Initial Jobless Claims Decline by Most in Nearly a Year Data potentially alleviate some concerns that the labor market is cooling too fast.

Initial claims decreased by 17,000 to 233,000 in the week ended Aug. 3, according to Labor Department data released Thursday. That was helped by fewer applications in states that had registered large increases in recent weeks, such as Michigan, Missouri and Texas.

The decline in initial applications may help reassure markets that the workforce is simply reverting to its pre-pandemic trend rather than rapidly deteriorating. (…)

The four-week moving average, a closely-watched metric that helps smooth out the data, moved up to 240,750, the highest in a year.

Continuing claims, a proxy for the number of people receiving unemployment benefits, edged up to 1.88 million in the week ended July 27, according to Labor Department data released Thursday.

While both initial and continuing applications for unemployment benefits have trended higher this year, they’re still hovering around 2019 levels.

Initial claims, before adjustment for seasonal factors, dropped by around 13,600 to 203,054, the lowest since May. Claims in Texas have subsided recently after spiking when Hurricane Beryl made landfall in early July, but the effects of Hurricane Debby on the Southeast may surface in next week’s data.

• Layoffs Are a Last Resort Looming for More US Companies

(…) “Employers have an intermediate lever they can pull, which is hours worked,” said Richard Moody, chief economist at Regions Financial Corp., adding that many firms remain hesitant to implement layoffs for now. “If they start to feel that things are slowing down and they’re going to stay slowed down, at some point they’re going to start letting workers go.” (…)

“People aren’t hiring, but people aren’t firing, okay, and that’s not normal,” Thomas Barkin, president of the Richmond Fed, said following Friday’s jobs report. “The question you have to ask is, ‘How long does a low-hiring, low-firing environment persist?’” (…)

Now, with roughly one vacancy per unemployed worker, in line with 2019 levels, officials have warned weaker demand may generate higher unemployment. (…)

“The old normal relationships are likely to start happening,” Fed Governor Christopher Waller said in May. “It’s not like we can continue from here on counting on vacancies absorbing any further decreases. We’re getting to that point where the traditional relationships are going to start popping out.” (…)

But demand seem to have stopped declining. Indeed Job Postings are up since July 1 through August 2.

My Recession Rule Was Meant to Be Broken The Sahm rule indicates that the US is in the midst of a downturn, but it’s not quite there yet.

(…) Right now, most of the data that the NBER considers look solid. For example, real consumer spending rose 2.6% at an annual rate in the second quarter, and monthly payroll gains averaged 170,000 in the past three months. A notable exception was employment as measured by the household survey, which is basically flat this year.

Still, while the economy is growing less quickly, it is growing. There is no recession, at least not yet.

The Sahm rule relies on a powerful feedback loop: Relatively small increases in the unemployment rate can turn into large ones. Workers without paychecks weigh on consumer demand, leading to more workers without paychecks. A rising unemployment rate also affects more than just the unemployed, since it normally coincides with fewer raises and job opportunities, as well as heightened uncertainty overall.

In US recessions from 1947 to 2007-09, the unemployment rate rose gradually in the early months and then increased substantially. On average, the peak unemployment rate is almost 3 percentage points above the pre-recession level. The increase in the unemployment rate over the past year fits within the range of earlier recessions.

The level of unemployment is not decisive — it’s the change that matters most. The US entered the 1969-70 recession with an unemployment rate of about 3.5%, for example, and the 1981-82 with it more than 7%. Over longer periods, changing demographics affect the overall unemployment rate. The Congressional Budget Office estimates that the equilibrium rate peaked at over 6% in the late 1970s and slowly fell to 4% last year, partly reflecting an aging, more experienced workforce. Focusing on changes over shorter horizons, like a year, makes recessions more comparable.

Which brings us back to Friday’s jobs report. The rise in the unemployment rate in July to 4.3% brought the Sahm rule to 0.53 — just above its trigger. Even so, there is good reason to view the current rise in the unemployment rate as overstating the recessionary dynamics.

Last fall, when the unemployment rate began to rise, and again this spring, as it rose notably in several states, I explained that things might be different this time — that is, why the Sahm rule might not be an indicator the US was in a recession. The increase in the labor force, particularly the surge in immigration, would contribute substantially to the rise in unemployment.

A rise in the unemployment rate due to weakening demand for workers gains momentum in recessions, which is why the Sahm rule has worked well historically. But a rise in the unemployment rate due to an increase in the supply of workers is different. The rate will decrease once the jobs “catch up” with the new job seekers and more workers allow the economy to grow more. The Sahm rule does not distinguish between these two dynamics, and can look more ominous when the labor force is expanding rapidly.

There are signs that stronger labor supply, not just weaker labor demand, helped push the Sahm rule past its 0.50 percentage point threshold. Unemployed entrants to the labor force (new or returning) accounted for about half of the increase. That’s a notably higher share than in recent recessions, when most of the contribution came from unemployed workers who had been laid off temporarily or permanently. The current Sahm rule reading is likely overstating the weakening in demand and not at recessionary levels.

Even so, there are risks. Recessions have occurred while the labor force is expanding, as in the 1970s, so the current episode would not be a historical outlier for the early stages of recessions. And the hiring rate is now back down to its 2014 levels, when the unemployment rate was 6%. Some of the contributions to the Sahm rule from entrants may also reflect less demand. The layoff rate often rises later in recessions.

Fed Chair Jerome Powell said last week that the data show “an ongoing, gradual normalization of labor market conditions.” And yet the rise in the unemployment rate over the past year, which my rule reflects, now looks like we are past normal and uncomfortably close to recession. It’s time for the Fed to use its own tools and reduce interest rates.

This Apollo chart shows the rise in immigration (only the legal entries).

Also from Apollo. Challenger job cuts are not problematic at all, so far…

David Rosenberg yesterday:

The YoY trend in Household employment is now running at 0% from +1.9% a year ago and +3.6% two years ago. Never before, not once, all the way back to 1950, has the complete evaporation in job creation in this survey over a twelve-month period failed to trigger the recession signal. Ergo, we are sticking with the call, as delayed as it has been.

This chart does not verify that. It also shows that employment is a lagging indicator.

JPMorgan Says Three Quarters of Global Carry Trades Now Unwound

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

SERVICES PMIs

USA: Activity rises markedly again in July

The seasonally adjusted S&P Global US Services PMI® Business Activity Index posted well above the 50.0 no-change mark again in July, dipping only slightly from 55.3 in June to 55.0. The reading signalled a marked monthly expansion in services activity, extending the current sequence of growth to 18 months.

Where output increased, companies often linked this to higher new orders. New business rose for the third consecutive month and at a solid pace, albeit with the rate of expansion easing slightly from that seen in June. According to respondents, customer referrals had played a role in them being able to secure new business during the month.

New business from abroad increased for the first time in six months, albeit only marginally and to a much lesser extent than total new orders.

Service providers remained optimistic that business activity will rise over the coming year, although confidence eased to an eight-month low. A greater focus on marketing and sales efforts is predicted to bear fruit. Meanwhile, a reduction in interest rates and an improvement in demand following the Presidential Election were also factors supporting confidence.

Positive projections for the coming year, allied with solid new order growth in the latest survey period, encouraged companies to take on additional staff as the second half of the year got underway. Employment increased for the second month running, albeit modestly and to a lesser extent than in June.

The modest increase in employment was not sufficient to fully keep up with new order growth in July, resulting in a second consecutive monthly rise in backlogs of work. The rate of accumulation in outstanding business was only slight, however.

Service providers signalled a further sharp rise in input costs, with the rate of inflation quickening to a four-month high. The latest increase was also sharper than the series average. Respondents indicated that higher wage and transportation costs had been the main factors pushing up input prices.

While a number of companies responded to higher input costs by increasing their selling prices accordingly, there were other reports that competitive pressures led some firms to lower their charges. The rate of output price inflation was solid, but eased for the second month running to the slowest since January.

The S&P Global US Composite PMI Output Index* registered 54.3 in July, down slightly from 54.8 in June but still signaling a solid monthly expansion in private sector business activity in the US at the start of the third quarter of the year. Growth was led by the service sector, while manufacturing output rose only marginally.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“The PMI surveys bring encouraging news of a welcome combination of solid economic growth and cooler selling price inflation in July.

“Another strong expansion of business activity in the service sector, which over the past two months has enjoyed its best growth spell for over two years, contrasts with the deteriorating picture seen in the manufacturing sector, where output came close to stalling in July.

“While manufacturers are reporting reduced demand for goods, this in part reflects a further switching of spending from consumers towards services such as travel and recreation. However, healthcare and financial services are also reporting buoyant growth, fueling a wide divergence between the manufacturing and service economies.

“Thanks to the relatively larger size of the service sector, the July PMI surveys are indicative of the economy continuing to grow at the start of the third quarter at a rate comparable to GDP rising at a solid annualized 2.2% pace.

“A further cooling of selling price inflation in the service sector meanwhile brings encouraging news for the Fed. Combined with a near-stalling of price increases in the manufacturing sector, the latest survey data point to average prices charged for goods and services rising at a rate which is indicative of consumer price inflation moving closer to the 2% target. However, the surveys saw some upward pressures on costs, especially in the service sector, which policymakers will likely be eager to see soften before being confident of inflation falling sustainably to target.”

The ISM:

Economic activity in the services sector expanded in July, a trend that has been interrupted only three times — though twice in the last four months — since early in the coronavirus pandemic, say the nation’s purchasing and supply executives in the latest Services ISM Report On Business. The Services PMI registered 51.4 percent, indicating sector expansion for the 47th time in 50 months.

“In July, the Services PMI registered 51.4 percent, 2.6 percentage points higher than June’s figure of 48.8 percent. (…)

The Business Activity Index registered 54.5 percent in July, which is 4.9 percentage points higher than the 49.6 percent recorded in June and a return to expansion after one month of contraction.

The New Orders Index expanded to 52.4 percent in July, 5.1 percentage points higher than June’s figure of 47.3 percent; however, the index’s current reading is its fourth-lowest since early in the pandemic. The Employment Index expanded for just the second time in 2024; the reading of 51.1 percent is a 5-percentage point increase compared to the 46.1 percent recorded in June.

“The Supplier Deliveries Index registered 47.6 percent, 4.6 percentage points lower than the 52.2 percent recorded in June. The index returned to contraction territory — indicating faster supplier delivery performance — in July after two months in ‘slower’ territory. (Supplier Deliveries is the only ISM^® Report On Business^® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.)

“The Prices Index registered 57 percent in July, a 0.7-percentage point increase from June’s reading of 56.3 percent. The Inventories Index contracted for the second consecutive month in July, registering 49.8 percent, an increase of 6.9 percentage points from June’s figure of 42.9 percent. The Inventory Sentiment Index (63.2 percent, down 0.9 percentage point from June’s reading of 64.1 percent) expanded for the 15th consecutive month. The Backlog of Orders Index returned to expansion territory for the fifth time in 2024, registering 50.6 percent in July, a 6.6-percentage point increase compared to the June reading of 44 percent.

“Ten industries reported growth in July. The Services PMI^® has expanded in 17 of the last 19 months dating back to January 2023, and the July reading is only 0.9 percentage point lower than the average of 52.3 percent over that period of time. Also, the PMI^® has not recorded back-to-back months in contraction since April and May 2020, another indication of sustained growth for the sector.”

Miller continues, “The increase in the composite index in July is a result of an average increase of 5 percentage points for the Business Activity, New Orders, and Employment indexes, offset by the 4.6-point drop in the Supplier Deliveries Index. The last time Supplier Deliveries was in contraction (faster) territory while the other three indexes registered expansion was in November 2023. Survey respondents again reported that increased costs are impacting their businesses, with generally positive commentary on business activity being flat or expanding gradually. Comments continued to express a wait-and-see attitude regarding the upcoming presidential election, with one respondent expressing concern over potential increases in tariffs. Many panelists noted a return to more stable supply chain performance, albeit with higher costs.”

Wells Fargo agrees with me that consumer spending is not about to take the economy in recession (baring an explosion in oil prices, see below):

(…) Renewed attention on the labor market notwithstanding, we think that an under-appreciated factor amid all the worry about the health of the economy is that households just keep finding ways to sustain spending. The labor market may be losing momentum, but in the latest personal income and spending report we learned that real services outlays grew 0.2% in June, the fastest pace in four months. While most of the spending on services goes toward non-discretionary categories such as healthcare and housing, consumers are still spending in other categories too. Real services spending less healthcare and housing rose more than broad services, up 0.24%.

Recall that S&P Global’s own Services PMI surveys never weakened like the ISM’s. On July 1, S&P wrote: “Total new business expanded for the second month running, and at a solid pace that was the fastest for a year.” That solid pace continued in July.

Corrections, particularly from all-time highs, happen from time to time. The S&P 500 is still just 8.5% below its record high of 5,667 on July 16. On that date, the S&P 500 exceeded its 200-day moving average by 15%, an overbought level that has often been followed by selloffs. [Yesterday], that spread was down to 3.5%. (Ed Yardeni)

THE YEN CARRY TRADE

The yen carry trade involves borrowing money in a low-interest-rate currency (yen) and invest that money in higher-yielding assets, or fast rising equities, denominated in another currency. The risk is if the yen appreciates significantly against the dollar.

That strategy has been helped by the significant depreciation of the yen in recent years. The yen was 103 per 1 USD in January 2021; it reached a 34-year low on June 27, 2024, at 160.49 Yen per 1 USD.

The yen has been appreciating since, closing at 150.76 per 1 USD on  August 1.

A major relative monetary policy shift (Fed vs. BoJ) is now underway as the BoJ shifted policy last week. Not only did the BoJ raise interest rates to levels unseen in 15 years, Governor Ueda said in the press conference that ‘neutral is some way off’ (i.e. more hikes coming).
BoJ hiking while Fed loosening.

That relative policy switch is happening against elevated yen short positioning. The jump in the yen has forced traders to rush to unwind their shorts.

Bye bye the ‘risk-on’ trade, hello risk off!

BTW, some of these hedge (!) funds used the carry trade to get long techs.

FYI, pay attention!

• Wall Street Journal: Iran has rejected requests from the United States and Arab countries to “show restraint” after the killing of Hamas leader Ismail Haniyeh. Tehran says it doesn’t care whether its strike on Israel leads to a major war or not.

• An underground bunker in the Jerusalem mountains has been prepared for Netanyahu and other Israeli officials in the event of an Iranian attack, The Times of Israel reports, citing the Walla news site. This bunker, also known as the National Control Center, was built almost 20 years ago. It has not yet been used during the current war with Hamas and the massive shelling by Iran in April.

• Sergei Shoigu (Secretary of the Security Council of the Russian Federation) arrived on a visit to Iran, where he will meet with the president, the secretary of the Supreme National Security Council and the head of the General Staff, the Russian Security Council reports.

• “Retaliation against Israel for the assassination of Haniyeh will be through a new scenario that will be implemented suddenly” says an advisor to the Commander of the Iranian Revolutionary Guard — Al Jazeera

FYI, pay attention!

• “I’m for electric cars. I have to be because, you know, Elon endorsed me very strongly,” Trump told the crowd. “So, I have no choice.”
• “Christians, get out and vote, just this time. “You won’t have to do it anymore. Four more years, you know what, it will be fixed, it will be fine, you won’t have to vote anymore, my beautiful Christians.” (Donald Trump)