US macro

A fantastic jobs and wages print, out overnight, driving a strong rally in stocks and bonds (yields lower).

Let your eyes draw to the top right graph, average hourly wages of all employees, monthly. That 0.27% print is well down from last month’s 0.55%, which, including October’s, was revised down substantially lower. I’ll come back to that point.

Next, notice the monthly non farm payrolls, printing at 223K. The declining trend is particularly noticeable, in other words, things in the overheated labour market appear to be cooling, without causing the unemployment rate (3.5%) to rise, a combination that is consistent with a market friendly “soft landing”.

Back to those revisions. You can see that last night’s revision to the two prior months was a massive negative, at ~2 standard deviations. You can see that November’s positive revisions was an outlier, that has now been more than offset (removed, didn’t happen).

Perhaps a translation: the unexpected strength in November was a statistical aberration, and the revised data is consistent with prior trend, and other macro indicators (like ISM’s, PMI’s etc), and we can be more confident that the soft landing is happening.

Market liked it. Stocks up, bond yields down. Good result. No change to our views or positioning, a soft landing is possible, even probable, and makes us want to hold stocks and bonds.

A hard landing is still a good chance, because the Fed has never succeeded in “slightly increasing the unemployment rate to lower inflation” without overdoing it, and causing the unemployment rate to go up a lot. That makes us want to hold bonds.

Either scenario we want to have some bonds, the only question is what type. Floating, or fixed, duration, or spread.

We’ve not called that particular trade off all that well, over the past year, but on net, staring out in to 2023, I think either is fine. We will likely go back to a fairly low growth, low inflation world, which suggests 10s trade closer to 3%, than 4%, and will likely be negatively correlated to stocks, in which case you get diversification benefits, bolstering the Sharpe ratio (the “holy grail”).

If we continue to have an overheated labour market, then rates will need to remain tighter for longer (this is essentially the base case view of the Fed members, as inferred from the summary of economic projections), in which case there is no 2023-back-end rate cuts, and floating is probably better.

But, because rates would be so restrictive, the odds of a hard landing rise, and the drop in activity takes us to the same place, 10s at ~3% or less.

Divining that particular path is challenging. The good news is that no-one else knows either. Maybe that’s also the bad news. But either way, diversification is still your friend.

Back to the markets. Dollar down, yields lower, markets up, a good result (note, the below is a medium run graph, so you can’t easily see last night’s moves).

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