Stocks stumbled on hard landing concern after US job report

·         Although the July job report looked ‘terrible’, if we consider the increasing number of multiple job holders and some seasonal factors, it’s still strong

·         Fed may not cut rates by -150 bps in H2CY24 based on a single month’s job report; it will consider a 6M rolling average of inflation, labor and GDP data

·         If the Fed indeed goes for an emergency or hurried rate cuts, it may be seen as a sign of central bank panic and may do more harm

·         The market is also worried about increasing geopolitical tensions between Israel and Iran after the assassination of the Hamas Chief by IDF/Mossad, but Iran may not launch an all-out war against Israel

On Wednesday, Wall Street Futures surged on hopes & hypes of an early Fed pivot by Sep’24 but was also undercut after Fed Chair Powell’s presser as Powell sounded/looked less dovish than expected. Also, escalating geo-political tensions over the Gaza war dragged stocks to some extent, while boosting Gold, which scaled almost $2450, but also stumbled again to almost $2429 early US Session Thursday as it’s becoming clear that Iran may not attack Israel directly despite the public narrative of its Supreme Leader Khamenei, who ‘ordered’ a retaliatory strike on Israel in response to the assassination of the Hamas chief by IDF/Mossed in Iranian soil.

But on Wednesday, the Fed went for a less dovish hold as Powell/Fed was non-committal about any rate cut in/from Sep’24 despite huge pressure from the financial journalists present in the presser and general market implied probability of almost 93% of a rate cut in Sep’24 (before the Fed). Although Powell/Fed acknowledged progress on the front of inflation confidence, Powell continues to maintain that it's not enough and Fed needs to get more confidence about the disinflation process thus Fed needs more economic data relating to inflation and employment for the next few months or at least Q3CY24 (?) before arriving at a decision. But at the same time, Powell also didn’t rule out the probability of a rate cut in Sep’24 and also said the Fed is very close to rate cuts, while at the same time also trashed away any idea about a -50 bps rate cut in any remaining single meeting of Sep/Nov/Dec’24.

On Friday the focus of the market was on the NFP/BLS job report for June, which may influence the Fed for any change in policy stance. The latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +114K payroll jobs in July against downwardly revised +179K sequentially (m/m); +184K yearly (y/y), and lower than the median market expectations of +175K.

After the latest revisions, the 6M rolling average (6MRA) of US NFP job additions is now around +194K, which is in line with the overall trend of above +200K, but lower than +222K prior report. Also after the latest revisions, the 2024 (MTD) average of US NFP payroll job addition was around +203K against +251K in 2023 and +377K in 2022. Although, the Fed’s  preference of around +200K; considering a higher labor force amid higher immigration and a higher working-age population, the Fed may now prefer 225-175K average run rate of NFP Payroll job addition for its maximum-minimum/red line employment mandate.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +97K payroll jobs in July from downwardly revised +135K sequentially (m/m) and +148K yearly (y/y), lower than the market expectations of +148K, and also lower than the ADP figure +122K (released Wednesday).

Now the 2024 (YTM) average of US private payroll job addition is around +165K against the 2023 average of +192K, 2022 average of +352K, and 2021 average of +571K. On the other side, the 2024 (YTM) average of ADP private payroll addition is now around +160K vs +209K in 2023. After the latest revisions, the 6M rolling average of NFP private job addition is now around +160K vs. +168K ADP survey.

 

The Government payroll, i.e., employment in Federal, state, and local governments added around +17K jobs in July against +43K addition sequentially (m/m); +36K yearly (y/y), and lower than the market expectations of +27K. After the latest revision, the 2024 (YTM) average is now around +38K against +59K in 2023, and +25K and +33K in 2022-21. The 6M rolling average of US NFP government job addition is now around +34K, lower than the prior reading of +48K. In the election year (2024); the government payroll job addition is quite upbeat and was running around the pre-COVID levels of an average of around +50K in the prior report.

In July’24, the US NFP payroll was boosted by job gains in private education & healthcare, leisure & hospitality, government, construction, and transportation & warehousing, while dragged by information/IT/Techs, financial activities, financial activities and professional business & services to some extent. Also, Government and social assistance job gains slow in July.

Overall, for the last six months, private education & healthcare services were the biggest employers, followed by government and leisure & hospitality (travel/tourism & hotels), transportation & warehousing, construction, retail trade, professional & business services, while US payroll job creation was dragged by mining & logging, manufacturing, and information/techs (AI disruption).

The U.S. economy is primarily a service sector economy (unlike China) and the service sector is the biggest contributor to the economy, but that too is significantly dependent on millions of immigrants, students, patients, and tourists from developing countries like India, Bangladesh, Pakistan, Sri Lanka, and other major South Asian/American/African countries and even China due to better standard of living, better democracy (freedom of speech/after speech), better pay, lower cost of living (price stability) and also currency leverage. But in the last few months, AI disruption may be also cutting human jobs in the tech industry.

An average minimum pay/income of around $5-10K is very attractive for average Indians working in the US as they can remit a huge amount (Indian standard in LCU) back home even after meeting the cost of living in the US, for creation of assets and helping to transform their families richer. Thus immigrants from developing/under-developed countries are eager to migrate to developed economies like the US for work and a better life even at minimum pay packages, while the US also needs these ‘cheap’ immigrants to balance of labor market demand & supply equation. More supply of immigrant workers is helping to cool wage growths of the labor market and also overall inflation. But now Native American workers are also not very amused as they are losing jobs to these immigrants and it now becomes a political/election issue.

 

The US, the world’s largest economy is the land of immigrant talents and innovation. The demand for private education and healthcare is huge among not only rich Americans but also rich immigrants, especially from developing countries like India, Bangladesh, and even China. Also, big corporate families from various developing countries like India usually send their children for education in the US to not only earn degrees from world renewed institutions but also to network as children of almost all big business houses in the world including the US/UK/EU are also studying in those big US educational schools/colleges/institutions.

Good networking among the future generation of big business houses globally will also help them make good business deals in the future and thus demand for expensive US educational institutes is huge; even Children of big political leaders & bureaucrats of various countries are studying & working in the US amid huge crisis in the education & quality employment issues back home (huge population, huge workforce, limited employment opportunities, and rampant political/normal corruption).

 

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for May was revised down by -2K to +216K, and the change for June was revised down by -27K to +179K. With these revisions, NFP employment in the last two months combined was down by -29K than previously reported (against a 2M negative revision of -111K in the last report). With the latest monthly revisions, the US economy added an average of around +203K payroll jobs (NFP) in 2024 (YTM) against the pre-COVID (2019) average of +168K, and the Fed’s goldilocks rate around +200K (175-225K), to keep an overall unemployment rate below 4.5% red line (long term sustainable unemployment rate keeping average core inflation around +2.0% as price stability).

The divergence between NFP and ADP private payroll job addition numbers is now also decreasing. The BLS survey samples a much larger number of establishments, around one-third of all nonfarm payroll jobs, compared to the ADP survey which is based on data from ADP's client companies, using ADP payroll processing software/system only.

The larger sample size of the BLS survey allows it to provide a more comprehensive and accurate representation of the overall employment situation in the US. Furthermore, the BLS survey uses more rigorous statistical methods and adjustments to account for seasonal variations, business births/deaths, and other factors that can impact population/labor force and employment data. This helps the BLS survey provide a more reliable and consistent measure of nonfarm (NFP) payroll employment than ADP.

The BLS survey is based on a sample of business establishments, while the ADP survey is based on payroll data from businesses that use ADP for payroll processing. Differences in sampling methods, sample sizes, and data collection techniques can lead to variations in the reported figures. The BLS establishment survey and the ADP private payroll survey are conducted at different times of the month, which can also contribute to variations in the reported figures.

As per household survey data, the nominal number of the civilian labor force increased by +420K in July to 168429K against the civilian population of 268644K (+206K); participation rate 62.7% vs 62.6% sequentially and against pre-COVID participation rate around 63.3%; while 2006 levels was around 66.4% (pre-GFC days). The current 6MRA of labor force addition was around +192K against population growth of +184K, while the labor force participation rate at 62.6%.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has added +67K employed persons in July, against the addition of +116K sequentially (m/m) and +205K yearly (y/y). The U.S. had around 161266K employed persons in July’24; eased from the recent life time high around 161866K scaled in Nov’23 and pre-COVID (Feb’20) levels of 158683K.

As per the BLS household survey, the average number of addition of employed persons for 2024 (YTM) was +12K in July against the 2023 average of +157K and 2022 average of +265K. This is sharply contrasting to the average addition of payroll employees as per the BLS establishment survey, which is +203K for 2024 (YTM), +251K for 2023, and +377K for 2022. The divergence between the two surveys may be explained by the increasing number of multiple job holders who may be counted twice/thrice in the establishment surveys against once in the household survey. The YTM average addition of multiple job holders was around +190K, almost equivalent to the average R/R difference (203-12=191K)

As per Household survey data, the nominal number of unemployed persons increased by +353K to 7163K in July against 6810K sequentially (m/m) and 5904K yearly (y/y). In July’24, the U.S. unemployment rate increased to 4.3% from 4.1% sequentially (m/m), 3.6% yearly (y/y), higher than market expectations of 4.1% and the highest since Oct’21.

The 2024 (YTM) average unemployment rate is now 3.9% against the 2023 average rate of 3.6%; the current 6M rolling average of the unemployment rate is also now 4.0%, still below the Fed’s 4.5% red line. The Fed may not allow the headline US unemployment rate to be above 4.5% for long; 4.0% was the average range in pre-COVID times.

The U.S. private Average Hourly Earnings (AHE) was around $35.07 in July’24 vs $34.99 sequentially (+0.2%) and $33.84 yearly (+3.6%); i.e. the U.S. AHE grew +3.6% yearly in July’24 against +3.8% sequentially, and below the market expectations of +3.7% (y/y). Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.00% on average against its +2.0% price stability (inflation) targets (as per the pre-COVID trend) so that there is some real wage growth, but may not cause wage inflation spiral. The average AHE growth for 2023 was around +4.5% against 2024 (YTD) +4.0%, still higher than the Fed’s target of around +3.0%, but in line with the pre-COVID trend.

On a sequential (m/m) basis, the AHE grew by +0.2% sequentially against +0.3% in the previous month, and below market expectations of +0.3% gain. The average hourly earnings (AHE) for all employees on US private nonfarm payrolls edged up +$0.08 sequentially to $35.07 in July’24. The Fed needs an average sequential AHE growth of around +0.2% consistently for its price stability targets, while the 2023 average was around +0.3%, almost the same in 2024 (YTD).

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll was edged down to 34.2 hours in July’24 from 34.3 hours sequentially (m/m), 34.3 hours yearly (y/y) and below the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) edged down -0.1% to $1199.39 in July’24 from $1200.16 sequentially, while increasing +3.3% yearly from $1160.71. This translates to average monthly earnings (AME) of around $4797.58 in July’24 against $4800.63 sequentially (-0.1%) and $4642.85 yearly (+3.3%); i.e. the AME edged down -0.1% sequentially (m/m) and +3.3% yearly (y/y) in July’24.

The average monthly growth of U.S. AME for 2023 was around +3.9% yearly (y/y) against CPI growths +4.1% (y/y); i.e., there were still no wage-inflation spirals and overall real wage growth was negative/almost nil. But in 2024 (till June), AME is growing by around +3.7% against average CPI inflation of +3.2%; i.e. average real wage growth in 2024 (till June) was around +0.5%.

 

Overall U.S. minimum/average NFP real wage growth is now turning positive (+0.5%) as inflation is falling, which is positive for the Biden & Harris admin (Democrats) ahead of the Nov’24 election despite some uptick in the headline unemployment rate. Also, data shows that immigrants are now getting more lower-end jobs (minimum pay) than Native Americans. Although this may be due to a lack of Native Americans, working at minimum pay lower end jobs,

Trump is now actively campaigning against Biden/Harris for an ‘America First’ political narrative, putting Biden/Harris (Democrats) at some disadvantage. In 2022-23, after all types of COVID era restrictions were withdrawn, there was a flood of legal/illegal immigrants; i.e. supply of more labor force and the previous imbalance between demand and supply got balanced to some extent, resulting in softening of wage pressure, labor market and also inflation subsequently.

Fine details of the US NFP/BLS job report indicate non-agri payroll employees (PVT+GOVT) were around 158723K in the establishment survey against 149789K in the household survey. The divergence between these two surveys (BLS establishment and household) is around +190K for 2024 (YTM); If we deduct the number of private sector payroll employees as per the BLS establishment survey and that of the household survey, we may have an idea of multiple job holders (employees under non-agri payroll), which is almost equivalent to the divergence.

In both the BLS establishment survey and the ADP private payroll survey, individuals who hold multiple jobs are usually counted based on their primary employment; i.e. only once. In the BLS establishment survey, individuals are counted based on the establishment where they work as their primary job. If someone holds multiple jobs, only the primary job is counted in the survey. The BLS survey collects data from business establishments and counts the number of employees on their payroll, regardless of whether they have one or multiple jobs.

Overall, as per BLS seasonally adjusted/unadjusted data, now almost 5.5% of employed persons in the U.S. are multiple job holders, against 4% in 2023 and 3.6% in 2022. The nominal number of multiple job holders was around 8914K in July’24 against 6129K yearly (y/y) and 5229K on average in 2021. The increasing number of multiple job holders over the years may be explained as:

·         People may be taking additional full-time/part-time jobs (WFH) to meet the increasing cost of living (still 20% higher inflation than pre-COVID times)

·         Fear of sudden layoffs/salary cuts during any financial crisis (like COVID, 2007 GFC)

·         The flexibility of WFH, higher productivity for both employees and employers (part-time/freelancers may do the same work more efficiently at lower pay than regular full-time employees), flexibility, time savings, schedule freedom, and sometimes lack of experienced workers for a specifically required skill; a flexible mix of WFH/WFO (remote/onsite) may be more positive for overall labor productivity and lower inflation

 

Similarly, in the ADP private payroll survey, individuals are usually counted based on their primary job. ADP gathers payroll data from firms/companies only that use their payroll processing services/software, and it counts each individual based on their primary employment relationship with the businesses included in the survey. If someone holds multiple jobs and one of those jobs uses ADP for payroll processing, only the primary job with ADP would be counted in the survey; if the multiple job is in another company, which does not use ADP payroll software/system, he will be not counted twice.

Both BLS and ADP surveys focus on primary employment relationships to avoid double-counting individuals who hold multiple jobs. But neither survey captures secondary job information comprehensively, so there may be some scope of undercounting of multiple job holders in both surveys. Additionally, the BLS survey samples a much larger number of establishments, around one-third of all nonfarm payroll jobs, compared to the ADP survey which is based on data from ADP's client companies, using ADP payroll processing software/system.

The increasing number of multiple job holders may be the reason behind a drop in the total number of employed persons and an increase in headline NFP job/employee numbers in the last few months. The US BLS NFP/Establishment survey may count multiple jobs twice (if a person is doing two jobs at a time in WFH/remote mode or even physically in two shifts), while the BLS Household survey does not count such multiple job holders as one employed person.

 

The BLS Household survey includes payroll employees and self-employed persons such as gig workers/freelancers, contractors, and agricultural workers. In the Household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll. Thus often there are divergences between the number of employees and several employed person additions in a month between these two BLS surveys (Establishment and Household).

In brief, the July’24 NFP/BLS job report may be termed as terrible, but the broader U.S. labor market is still goldilocks in nature if we consider the increasing number of multiple job holders, the US economy is adding now around +200K employed persons per month on an average.  Also, the 6M rolling average of the US unemployment rate is around 4.0%, still below the Fed’s 4.5% red line, while core CPI +3.6%, still above the +3.0% Fed red line, below which Fed should have enough confidence for starting the eleven rate cut cycles. This may not be possible before Sep-Nov’24.

·         The average NFP job addition for the last 6 months is now around +194K, in line with the Fed’s goldilocks rate of +200K

·         As per the Household survey, the overall average addition of employed persons and labor force for 2023 was around +157K vs +204K, while the same for the last six months (6M rolling average) is now +184K vs +12K; the divergence is due to the factor of multiple job holders, which was +108K on an average in 2023 and +190K in 2024 (YTM)

·         Overall real Average Monthly Earnings growth is turning positive, in line with the Fed’s objective for a soft landing with real wage growth around 1.5-2.0%; overall real wage growth is now around +0.5%

·         Overall, although the 6M rolling average of the headline unemployment number was around 4.0%, just below the 4.5% red line, if we consider the increasing number of multiple job holders, it was almost equivalent to the decrease in the headline number of employed persons.

·         Thus overall US BLS job report and also core inflation for 2024 are still hot enough and the Fed may not be in a hurry to cut rates just ahead of Nov’24 US Presidential election

·         Although the US labor market is now gradually cooling in various parameters after the rapid increase in immigrant workers in 2022-23; now the Fed is concerned about whether the supply of labor force will be adequate/enough to meet still elevated job postings in 2024 too considering growing domestic political compulsion (ahead of Nov’24 election) over legal/illegal immigration (cheaper labor force), now affecting employment opportunity for native Americans.

·         Overall the Fed will not take any rate action based on a single month BLS/NFP job and inflation report; the Fed will take into consideration at least the 6M rolling average of core inflation and employment data before taking any rate action.

·         Looking ahead, the Fed may consider Q3CY24 along with overall/H1CY23 economic data before going for any rate cut cycle from Dec’24 (after the US election) rather than cutting rates by -50 bps each in Sep+Nov+Dec’24, which may be termed as too much excessive and central bank panic

·         The June’24 US NFP/BLS job report may be termed terrible apparently, but it may be more due to seasonal adjustment/factors; also if we consider the sudden addition of a labor force addition of +420K against the normal average rate of around +200K (due to seasonal adjustments) and temporary layoff 1062K against 800K average in July’24 (due to Hurricane Beryl)

·         Further, if we consider at least 1% of multiple job holders around 8934K in July’24, the nominal number of unemployed persons would be around 6270K against a labor force of 168429K, translating to an unemployment rate of around 3.7%, not 4.3% as printed

 

Conclusions:

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market impact:

On Friday/early Monday, Wall Street Futures plunged into the panic of so-called hard-landing (Sham recession rule) despite hopes & hypes of an early Fed pivot by Sep’24. Also, escalating geo-political tensions over the Gaza war dragged stocks to some extent, while boosting Gold, which scaled almost $2450, but also stumbled again to almost $2420 early US Session Monday as it’s becoming clear that Iran may not attack Israel directly despite the public narrative of its Supreme Leader Khamenei, who ‘ordered’ a retaliatory strike on Israel in response to the assassination of the Hamas chief by IDF/Mossed in Iranian soil. But Israel may again launch a ‘staged’ drone/missile attack on some remote places in Israel to satisfy domestic political compulsion, while Israel is also getting ready to defend such an attack. Israel's PM Netanyahu is also gaining politically after the assassination of the Hamas Chief.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever the narrative, technically Dow Future (40848) has to sustain over 41200 for any further rally to 41400/41500-41700*/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 41100/40900-40700/40500, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (19173) has to sustain over 18800 for any recovery to 19300*/19600-19750/19950 and 20150*/20600-20800/21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5498), now has to sustain over 5400 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2385) has to sustain over 2400/2410-2430/2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2395/2390-2385/2360-2350*/2340, may further fall to 2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).