Today is the day you’ve been waiting for all week. Positioning appeared to be somewhat cautious ahead of the event. Consensus view is for seasonally adjusted job creation of 250,000 positions for July. While that doesn’t seem so bad, and traditionally is not, this number would be the weakest print for that data point since December.
While unemployment is expected to remain at 3.6% and participation is expected to repeat at 62.2%, or maybe tick slightly higher, it is underemployment that economists (or at least this economist) now watch. June offered up another rather strong overall jobs report. It is in the underemployment situation, which is undercovered by the financial media, that I think we will see the first signs of distress.
Labor markets have proven far more resilient than other parts of the economy as the nation has entered into recession, or at least knocked (pounded) on that door. Debt markets were the first to price in recession and are, to be honest, still there. The US 2-year/10-year yield spread traded as wide as -39 basis points on Thursday, which was the deepest inversion for that particular spread since the year 2000. Commodities have followed suit, with crude oil in particular erasing all post Russo-Ukrainian war gains. Even housing markets have shown signs of cracking.
Labor has been different, however. You and I read headlines almost every day of one company or another planning to either slow hiring or make outright reductions to payrolls. Challenger reports that U.S. employers announced almost 26,000 job cuts in July. This was up 36.3% over July 2021 and came after the more than 32,000 cuts announced in June. That was a 58% increase over June 2021. May 2022 was the first of what is now three consecutive months of “positive” numbers for announced job cuts after a 14-month string of “negative” growth for this space.
Which leads us back to the U-6 unemployment rate, also known as the “underemployment” rate, as it not only includes the unemployed who seek employment but also those working part-time who seek full-time employment. What this item can be is an early indicator for decreasing demand for labor that flashes prior to when more focused-upon numbers might.
For June, seasonally adjusted, the U-6 rate dropped to 6.7% from 7.1%. However, unadjusted, U-6 increased in June from 6.7% to 7.0%, so as you can see there is some confusion around this number. Again… “Seasonal” adjustments showed an improving condition for underemployment in July, while the raw data showed conditions to be in a state of deterioration.
What I think we need to see in this report, overall, is something lukewarm, almost pre-recessionary in nature. The last thing markets and the economy need right now is for the Fed to overreact to anything. As I have stated repeatedly, the time has come for increased finesse in the application of monetary policy. Core inflation apexed about six months ago. Thanks to ebbing food and energy prices, headline inflation should show some improvement for July and greater improvement for August.
An exceptionally strong employment report will provoke the Fed and Fed speakers ahead of Jackson Hole, which is where they can lay the seed for a potential pivot if they are on the ball. Provoked by greater job creation or year-over-year wage growth than expected would make that politically difficult.
We do not need an especially weak report for July, either. A much softer report than expected will frighten investors concerning the depth or severity of the current recession that many still do not believe we are even in. This would cause profit taking going into the weekend that might not end there after the nice run that equities have been on.
On Thursday, trading volumes cooled from Wednesday’s torrid pace, but at least for the Nasdaq remained elevated compared to recent norms. The Nasdaq Composite, Nasdaq 100 and Dow Transports all made pedestrian gains, while the S&P 500 and Russell 2000 suffered tiny losses. The Philadelphia Semiconductor Index, which has been the market darling of late, retained that title, gaining 0.92% for the session.
Indeed, seven of the 11 S&P sector-select SPDR ETFs showed gains on Thursday, led by growth. Technology (XLK) and Communication Services (XLC) gained 0.46% and 0.43%, respectively. Only Energy (XLE) , which easily finished the session in 11th place at -3.71%, lost more than 0.66% on the day.
Breadth was interesting. Losers beat winners at the New York Stock Exchange by the narrowest of margins (16/15), while winners beat losers by a rough 5 to 3 at the Nasdaq Market Site. Advancing volume took just a 44.9% share of composite NYSE trade on Thursday, but a far more robust 66.6% share of composite Nasdaq trade. Volume ebbed slightly for names listed at both of New York’s primary exchanges.
West Texas Intermediate (WTI) crude gave up 2.3% on Thursday, going out at $88.54 per barrel, which is a level not seen since prior to Russia’s invasion of Ukraine. The facts that Russian oil has remained frustratingly available globally (even if at a discount) and that global economies are steaming full speed ahead into a state of contraction have worked to create an environment conducive to lower prices for oil and gasoline. Obviously, natural gas, especially European natural gas, is playing a different game this year.
Interestingly, looking forward, WTI crude futures are cheaper for each month (backwardation) through at least May 2023 from the month prior. There are signs, though, that this condition is easing, as perhaps underlying tightness relaxes toward the end of the traditional driving season in the US. I, myself, drove past a gas station on Thursday that was sporting a $3 handle (per gallon) for premium unleaded gasoline. Had not seen that for a while, and it was nice to see. Unfortunately, I did not need gasoline at the time.
I am underweight Energy as I have been for a few weeks. I remain long two energy names, as I will not go down to zero exposure to this space. I am still long Chevron (CVX) as I have been throughout, and I am long Occidental Petroleum (OXY) just in case the Oracle of Omaha decides that he wants the whole thing.
Tesla Shareholder Meeting
There were a few key takeaways from Thursday evening’s Tesla (TSLA) shareholder meeting in Austin, Texas.:
1) Tesla intends to produce 20 million vehicles annually by 2030. This will require about a dozen facilities all producing 1.5 million to 2 million vehicles per year. Currently,Tesla builds vehicles in the US (Fremont, Austin), China (Shanghai) and Germany (Berlin). CEO Elon Musk allowed investors/fans to speculate over the potential for adding a facility at some point in Canada.
2) Cybertruck is still targeted for mid-2023, but Tesla conceded it will be unable to sell the truck with the same specs and pricing that had previously been discussed.
3) Musk also stated that Tesla would increase its capex and spending on research and development “as fast as we can do so without wasting it.” Musk also hinted at a possible share repurchase program.
4) Shareholders gave preliminary approval to a three-for-one stock split, two years after the stock split five for one in August 2020. A final tally will be filed on an SEC Form 8-K within four business days.
July Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 250K, Last 372K.
Unemployment Rate: Expecting 3.6%, Last 3.6%.
Underemployment Rate: Last 6.7% y/y.
Participation Rate: Expecting 62.3%, Last 62.2%.
Average Hourly Earnings: Expecting 54.9% y/y, Last 5.1% y/y.
Average Weekly Hours: Expecting 34.5, Last 34.5 hours.
Other Economics (All Times Eastern)
13:00 – Baker Hughes Total Rig Count (Weekly): Last 767.
13:00 – Baker Hughes Oil Rig Count (Weekly): Last 605.
15:00 – Consumer Credit (June): Last $22.35B.
The Fed (All Times Eastern)
No public appearances scheduled.