JOLTs instance "hard" converging towards improving "soft" data. At this pace, Fed gets 1.0 openings/worker ratio by Oct/Nov. Nasdaq 100 became "100% bid". Since 1996, 6 of 6 times, saw further gains.

After a tumultuous decline in the final weeks of September, market technicals were awful and sentiment and positioning bearish. But in each of the past two days, equities rallied strongly, adding >5% to all the major indices.

• the ostensible fundamental catalyst has been the signs that the labor market is softening, but not necessarily in a way that spells recession
• on Tuesday, the JOLTS (job openings) report showed the largest ever drop in job openings (ex-pandemic) with a 1.1 million or 10% drop
• this brought the key (watched by Fed) openings/worker ratio to 1.67 from 1.97, or -0.30 in a single month
• at this pace, the jobs market will fall to 1.0 by October/November. JOLTS has a severe 6 week lag
• on Monday, the ISM manufacturing report showed a sharp drop in both the employment and prices component
• Why is this positive? This is one of the 3 key things the Fed is looking for (other two are slower GDP and slower inflation).

Is there a reason to believe this is more than a “bear market rally”?

Given the generally poor win-ratio for rallies in 2022, investors are naturally viewing the gains over the past two days as just another “bear market rally.” But there are a few factors to consider and these could argue investors should respect these gains:

• In the past week, Fed funds expectations for May 2023 (using futures) has fallen by nearly -50bp, or 2 hikes as inflationary risks abate. At 4.38% this is also about -30bp (1 hike) below Fed “dot plot”
• USD index is back to 110, which is the level seen around the August CPI report (9/13) or a >5% reversal
• Both UST 2Y and 10Y have roundtripped from their nearly 50bp surge post-Sept FOMC meeting, meaning markets see less tightening ahead
• US high-yield spreads (OaS, or options adjusted spreads) did not make a new “wide” last week, while equities closed at a new low
• Historically, this divergence bears watching as this similar pattern emerged in comparing Oct 2008 vs March 2009.
• the VIX closed below 30 for the first time in a week and the term structure is back to a normal contango
• the Nasdaq 100 was “100% bid” Tuesday as flagged by our data science team (thanks Matt Cerminaro)
• since 1996, this has only happened 6 times, and 6 of 6 times the NDX is higher 6M and 12M later with average gains of 27% and 34%.
• lastly, Tuesday is scored as an official “90% up day” by Lowry (90% of issues and 90% of volume advancing) following an 80% up day Monday (really 87%). So this could be a sign of rejuvenating investor demand

Bottom line: There seem to be more than a few things that suggest that this two day rally is not just an oversold rally aka dead cat bounce. But we understand why investors will view any rise in stocks with skepticism.

Ultimately, we believe the most important takeaway is this:

• the rally in the past two days is seemingly in response to signs the labor market is softening but not in an adverse way (fewer openings, but employed still solid)
• stocks advanced 5% on a “hard” data point showing cooling pressures, because markets and the Fed no longer trust forward looking models
• if incoming data further supports this view, we see ample room for equities to rise as risk premia could fall far further
• read this as there is ample room for credit spreads to narrow, Fed expectations to fall, VIX to fall, sentiment to improve, and on and on
• Could the Fed again come out and declare the rise in stocks “incorrect”? yes

NASDAQ 100: “100% bid” seen only 6X since 1996. 6 of 6 times higher 6M and 12M

We are in unusual market conditions, as the Fed and central banks around the world fight inflation. And the rapid and fierce decline in stocks has undermined investor confidence. Still, our data science team (thanks Matt Cerminaro) flagged a pretty interesting development Tuesday:

• the Nasdaq 100 saw all stocks (100%) rise
• There are only 6 prior instances of this “100% bid” breadth thrust for the NASDAQ 100

The precedent instances are shown below on the Nasdaq 100 price chart (“red” dots).

• notice how these “100% bid” days come at the end of a sell-off?

No instance of “100% bid” happened during a bear market rally

The forward returns for the NDX are shown below. As shown, the forward returns are impressive:

• 5 of 6 times, NDX higher in 3 months with average gains 12%
• 6 of 6 times, NDX higher in 6 months with average gains of 27%
• 6 of 6 times, NDX higher in 12 months with average gains of 34%
• these never happened in a “bear market rally”
• In isolation, this is very bullish

FED FUNDS: May 2023 Fed funds fall 50bp in past two weeks and roundtrip Sept FOMC

Fed funds May 2023 futures are shown below and you can see the sharp drop in the past week:

• post-Sept FOMC, May 2023 rate expectations soared from 4.6% to 4.8%
• this was 20bp above the Fed’s “dot plot”
• but these same futures are at 4.38%, shedding 50bp or 2 hikes

I found this interview of Barry Sternlicht on CNBC insightful. He made a forceful argument the Fed is overdoing the hikes.

• and that seems to be the message in the Fed funds futures
• especially in light of the favorable developments in the trends of the labor market

But rates and USD have also returned to pre-Sept FOMC levels, roundtripping as well. In fact, the USD is back to August CPI date (9/13).

DIVERGENCE: We are watching the divergence in favorably HY vs new lows in equities

We generally view credit as leading equities, and at points of divergence, credit often is the signal. Take a look below:

• high yield spreads (OaS) did not make a new wide in Sept (vs June)
• but the S&P 500 made a new closing low
• this divergence was also seen in Oct 2008 vs March 2009 and was an important signal in establishing the March 2009 lows
• high-yield is a close cousin of equities as there is equity-like risk in lower rated credits. Thus, these two markets should move in tandem
• and as shown below, they were moving in tandem until September

JOLTS: Job openings falling like a rock

The JOLTS was a major downside read as job openings fell 10% in August (vs consensus of <1% drop).

• this has brought the openings/available worker ratio down to 1.67 from ~2.0 for most of 2022

JOLTS: At this pace, the openings/worker ratio could fall to 1.0 by October/November

Does anyone actually think the job market going forward will be stronger? Here is the interesting thing:

• the ratio fell to 1.67 from 1.97 in July
• this is a -0.30 change in a month
• at this pace, the ratio could fall to 1.0 in two months
• that means the JOLTS for Oct or Nov could show employment market fully in balance

JOLTS crashing but unemployment steady

The promising aspect is the job openings are falling but the unemployment is not rising. And as Renaissance Macro below notes:

• “Waller’s thesis is playing out”
• meaning soft landing intact

Recall, last week, we highlighted the Fed working paper “the Dual Beveridge Curve” which describes their analysis that much of the growth in job openings (JOLTS) comes from poaching and not hiring unemployed workers.

• thus, slowing labor market
• might only impact JOLTS more than employment levels

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