HY not making new wides, despite S&P 500 making new lows = divergence. HWOL data suggests JOLTS job opening ratio could fall to 1.85 for August (reported 10/4)

This week is even uglier than last week.

Financial markets have become even more wary this week, with markets concerned about a plethora of factors as the Fed remains committed to cooling inflation at a time when uncertainty is fueled by Russia-Ukraine war and diminished liquidity in markets. So investors are worried that something will break.

But in our view, the key interplay remains the trajectory of inflation and its ultimate influence on central banks. Tight labor markets and the view that “services” are less sensitive to interest rates, mean many investors see upside risks to inflation. But on the other hand, leading indicators such as goods, freight rates, home prices, gasoline, inflation surveys, market-based measures of inflation all point to softer inflation.

• ultimately, this becomes a question when the cadence of data supports an inflection of inflation
• a constellation of leading indicators point to goods inflation slowing and the largest services component, housing, has the “seeds of a peak” in place given the sharp downturn in home prices
• but this remains a period where investors prefer to wait out the data
• and hence, stocks suffer from a buyers’ strike

Key macro data incoming next 10 days

Below are some of the key incoming macro data points in the next 10 days. The two most important being PCE/U Mich (9/30) and JOLTS (10/4). Key events in the next 10 days:

• 9/30 PCE deflator (Aug)
• 9/30 U Mich Consumer 1-yr inflation (Sept final)
• 10/4 JOLTS jobs openings (August)

• 10/3-5 ISM Manufacturing + Services
• 10/7 Sept payrolls

Economists expect August Core PCE YoY could rise to 4.7% or higher…stronger than consensus

As for August PCE, JPMorgan Economists are looking for PCE Core to firm in August to +0.47% and YoY would be 4.7% or higher. Separately, some other economists have told us this could be +5.0%. The high water mark was 5.3% in February 2022, and a move to 5.0% would alarm investors:

• but this does not change the larger fractal
• while timing certainly is an issue, headline inflation has likely peaked
• core is still strong, but with combined effects of housing, passthru lower energy and core goods slowing, this favors probabilities of this weakening in the future

For those wondering what comprises the difference between PCE and CPI, the concepts are similar but have differing weights. This was compiled by our data science team, led by tireless Ken:

• PCE has a higher weight in Medical, Recreation and Financial Services (“other”)
• but PCE has a lower weight in Shelter, Transportation (cars, etc)
• So hard to gauge how the variance in weights ultimately impacts the trajectory

And despite lots of expectations for the August PCE deflator to come in “hot,” forward inflation expectations remain pretty well anchored. In fact, with the selloff in asset markets Thursday, US inflation breakevens fell across the board.

INFLATION: Inflation expectations (market-based) tanking yesterday 10%-declines

JOB OPENINGS: HWOL data suggests job opening ratio could fall to 1.85 for August (reported 10/4)

The Fed would like to see labor markets soften via job openings but without necessarily desiring a weakening of employment. In other words, they want to bring the labor market back into balance:

• slow demand via job openings
• but not harm supply (workers) necessarily
• get the ratio down from 2.0 currently (job openings/available workers)

The JOLTS is the survey the Fed uses in this calculation and in citing the above ratio. The JOLTS report is reported with a large lag.

• the August JOLTS survey will be released on 10/4, or 6 week lag
• the Conf Board HWOL (help wanted online index) is reported 3 weeks earlier
• and as we noted earlier this week, has a near 99% correlation to JOLTS

Conf Board HWOL suggests JOLTS openings to fall at least 0.8% in August

The Conf Board HWOL fell -0.8% in August (below) and as shown below, for the past few years, has been a very strong predictor/leading indicator of where JOLTS figures will settle.

• JOLTS could fall -0.8% in August

HWOL implies JOLTS ratio could fall to 1.85, not quite 1.0 but progress from 2.0 prior month

Applying the HWOL monthly change to JOLTS implies the following:

• job openings fall to 11.149 million
• BLS already reported 6.014 available labor force
• this ratio implies 1.85
• this is the best figure since Feb 2022
• a sign the labor market is coming into balance

New Fed working paper offers reason JOLTS is so tight — it’s about “poaching” not unemployed

One of our clients (thank you PB of PBI) forwarded us the Fed working paper titled “the dual beveridge curve” published 9/7/2022 (authors Anton Cheremukhin and Paulina Restrepo-Echavarria). The essence of the report is:

• job posting can be divided into openings for “unemployed” and for “poaching”
• entire rise in JOLTS since 2020 is mostly “poaching”
• reason not clear why
• but this suggests that job postings can fall sharply but not necessarily drive higher unemployment
• this is essentially in support of the soft landing argument

The rise in postings to >11 million is a puzzle as this is far above what is considered reasonable for the level of unemployment. This relationship is called the Beveridge Curve and we have highlighted the WSJ.com chart on this:

• unemployment today is similar to Feb 2020
• yet, job openings, or vacancy rate is nearly 70% higher

This has been a puzzle for economists. This is especially important since Fed is focused on JOLTS as their measure of the labor market. And the high level of openings points to an exceptionally tight job market:

• naturally, this report has gained a lot of attention

The chart below from this report is perhaps the most interesting. It shows that the rise in job openings is primarily for poaching. The authors do not know the reasons and have suggested future researchers will solve this. But some possible reasons:

• companies proactively seeking labor to avoid shortages (wsj.com article suggests this is case)
• there is a shortage of skilled labor thus a fight for workers (bad)
• online and remote work and pandemic are creating mismatches of labor supply and location

But as shown below, the Beveridge curve is normal when excluding poaching.

And the conclusion is that Fed can soften labor market but not drive higher unemployment rate:

• this is what Fed is seeking
• to slow economy without necessarily causing a recession
• nor having to push up unemployment rates as sharply as many argue (5% or more)
• and also means

And more economists are offering similar views. This is an Op-Ed in the FT by Liz Ann Sonders on this subject.

STRATEGY: Financial conditions are bad, but stocks seem far worse off than credit

As noted above, financial conditions have tightened and there are known liquidity issues developing in credit, including CLOs and mortgage REITs. But one of the most important markets to watch is high-yield spreads (OAS, options adjusted spread).

• as shown below
• HY spreads widened but are below June 2022 levels
• and far below levels seen in prior cycles
• even below 2016 levels
• so this raises question whether stocks need to be punished as much as they have been

Bonds generally lead stocks. Thus, take a look below and see this divergence:

• high yield spreads are narrower now versus June 2022 wides
• this means “required extra yield” is lower versus June 2022
• yet, S&P 500 is below its June 2022 levels
• this is arguably a constructive divergence, as it argues stocks have fallen too far

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