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The Most Important Number In Today’s Jobs Report

The spread between Labor Demand (Household Survey Employment + JOLTS) and Labor Supply (Total Labor Force) rose to 3.7mil in July from 3.6mil in June. This statically rare phenomenon of excess labor demand is the key reason wage growth remains robust amid trending “immaculate disinflation” and improving Nonfarm Productivity (3.7% QoQ SAAR in Q2; highest since 3Q20).

The US Economy Is Very Strong

Yesterday, Darius joined Anthony Pompliano to discuss Consumer Spending, Personal Income, Inflation, and more.

In case you missed it, here are the three most important takeaways from the interview: 

1. Consumer Spending Has Accelerated In Recent Months

Consumer spending, the total value of all goods and services purchased by households, makes up 68% of GDP.

Last week’s PCE report indicated that Real Personal Consumption Expenditures accelerated to 2.9% in June, primarily driven by a rebound in goods consumption – a three-month high.

In addition, Real Goods PCE accelerated to 5.4% on a three-month annualized basis, also a three-month high.

Both readings suggest US consumers remain incredibly resilient.  

2) Accelerating Income Growth Supports Our “Resilient US Economy” Theme

Even if individual real wages are declining, as we have seen recently, overall consumer income can still grow from increased employment, government support, and other income sources.

Nominal Employee Compensation, the broadest nominal measure of income published about the labor market every month, accelerated to 6.2% three-month annualized in June – the highest reading since September last year.

Additionally, Personal Interest Income, the income individuals receive from interest-bearing assets like savings accounts and bonds, accelerated to 8.8% three-month annualized basis in June. 

This figure is the highest number we have seen since January of this year and signals that consumers may have more disposable income to spend. 

3) The Inflation Fight Is Improving Significantly

Typically, inflation breaks down AFTER a recession. This year, we have seen the opposite – a term referred to as “immaculate disinflation”.

In Friday’s PCE report:

We expect the YoY inflation numbers to follow the low three-month annualized rates over the coming months, strengthening the immaculate disinflation narrative supporting asset markets.


That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund caliber investment insights.
  2. RT this thread and follow @42Macro and @42MacroWeather.
  3. Have a great day!

From Recession to Goldilocks

Over the weekend, Darius joined Andreas Steno Larsen on the Macro Sunday podcast to discuss the resiliency of the U.S. economy, Recession, and more.

In case you missed it, here are three takeaways from the interview you need to know: 

1. Despite Most Investors Calling For Recession, The US Economy Is Actually Accelerating

The Q2 GDP advance estimate report, released last week, indicates that GDP increased at a 2.4% annualized pace in the second quarter, surpassing the 2% estimate.

Further, the recent advance report on the latest Durable goods and CapEx data also supports our “Resilient US Economy” theme. Specifically, we saw:


Last week’s data suggests an accelerating economy; we urge bears out there to manage risk and #respectthexaxis regarding calls for a recession.

2. US Economic Resiliency Should Continue Into Q4 And Potentially Well Into Q1:

The economy has been and will continue to be resilient for the following reasons:

We expect the economy to remain strong well into Q4 of 2023 and possibly well into Q1 of 2024. By then, we believe the recession will commence. 

3. Investor Positioning Is Incongruent With the Rising Probability of a Soft Landing 

Our research tracking aggregated US equities positioning across the various equity instruments suggests that the market is currently net short approximately -7%.

That reading is in the 13th percentile of all historical readings in the time series since 1998, which suggests investors are deeply entrenched in the bearish narrative.

If there is going to be a soft landing in the economy – which we believe is a higher probability than a recession that starts in less than three months – investor positioning is currently and extremely under-positioned for it.

That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund caliber investment insights.
  2. RT this thread and follow us on Twitter  @42Macro and @42MacroWeather.
  3. Have a great day!

Is the Fed Done Hiking?

Earlier this week, Darius joined Maggie Lake and Andreas Steno on Real Vision to discuss the Fed, Inflation, and more.
If you missed the interview, we have you covered. Here are three key insights that will save your portfolio:

1) We Believe The Narrative Surrounding Inflation Will Change In 3-6 Months

The interplay between immaculate disinflation and rising soft landing expectations has been the driver behind asset markets this year.

We believe any potential shifts in this narrative are not being adequately priced into market forecasts.

Reviewing several key inflation measures—median CPI, trim mean CPI, median PCE deflator, trim mean PCE, core PCE, and super core PCE—highlights a concerning trend. Sequential trends, especially for median CPI and trim mean CPI, indicate stagnation between 3% to 4%. If this lack of progress continues, it could be problematic for the economy.

Our models indicate that a recession in the US economy is unlikely to begin until Q4 this year or Q1 next year, with the depths of the recession probably not hitting until the second or third quarter of next year.

2) The Rate of Change of Inflation Is Important, Not the Level

Investors should be concerned with inflation’s direction and velocity – not the current level. 

Why? Because the rate of change is what markets react to. While the Federal Reserve may concern itself with the actual level of inflation, investors should strive to be one step ahead of the Fed, analyzing shifts in the direction and speed of travel.

3) A Soft Landing In Growth = A Soft Landing In Inflation

Inflationary impulses in the economy take time to permeate fully – this explains why the BLS and BEA measure inflation as they do. 

Inflation has subsided back to around 2% when you exclude the lagging housing components of inflation. 

Notably, core services ex-housing CPI and the core services ex-housing PCE deflator are showing three-month annualized rates of 1.4% and 3.2%, respectively. 

If we do have a soft landing, it will likely be at some point in 1H24 — a scenario that, while not the most probable, is far more likely than a near-term recession. 

Under these conditions, we believe we would see metrics like super core CPI, super core PCE, and core PCE firm up and begin accelerating again.

That’s a wrap! 

If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!

Is Wall Street Calling The Fed’s Bluff?

Earlier this week, Darius joined Anthony Pompliano to discuss Manufacturing, the U.S. Consumer, Bitcoin, and more.

Miss the discussion? No problem. Here are the three most important insights that can help your portfolio:

1) Healthy Balance Sheets And A Robust Labor Market Are Contributing to a Resilient U.S. Consumer

Since August of 2022, we have consistently maintained the view that the U.S. economy would remain robust, despite recession fears.

June’s retail sales reported a 4.6% increase on a three-month annualized basis and the highest print we have seen in four months – further proof of the resilience of the consumer we have consistently called for.

Additionally, a significant driver of the increase in retail sales, auto sales, accelerated by a striking 23% on a three-month annualized basis.

Two key contributors to this consumer resilience have been healthy consumer balance sheets and a strong labor market.

2) Leading Manufacturing Indicators Point to Near-Term Bottom in the Inventory Cycle

The ISM Manufacturing PMI, the most widely used leading indicator for the broader US manufacturing cycle, recently dropped to 46.0 in June – a new cycle low.

However, the spread between the ISM Manufacturing New Orders PMI and ISM Manufacturing Inventories, which is a leading indicator of the headline index, suggests a bounce in the ISM Manufacturing PMI in the coming months.

A recovery in the inventory cycle would add additional support to the soft landing narrative and incrementally contribute to the epic short squeeze in US equities that we have and continue to call for.

3) S&P 500 and Bitcoin Correlations:

As part of our 42 Macro research, we conduct a multi-factor correlation study, tracking the S&P 500 and Bitcoin in relation to various macro factors.

Recently, the primary driver of the S&P’s performance has been cyclical growth expectations.

Bitcoin, however, is being driven by structural growth expectations, but inversely, and is rallying on potential recession prospects, which would pressure the Fed and other central banks to provide the market with ample liquidity.

Although most investors bundle risk assets into one broader bucket, the reality is that there is often a divergence between what drives different asset markets.

We believe the Fed will begin providing liquidity to the market by the spring of next year, creating a positive environment for risk assets into and through the end of 2024.

That’s a wrap!

If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!

Macro Outlook

Darius joined Benjamin Cowen from Into The Cryptoverse earlier this week to discuss Inflation, the Labor, Liquidity, and more.

If you missed the interview, we have you covered. Here are three key insights that are important for your portfolio:

1) Despite The Recent Dovish Print on Inflation, We Believe The Fed Will Hike At The July Meeting

The money markets are currently pricing in approximately an 80% probability that the Federal Reserve will hike at their next meeting.

Generally, the Fed tends to move in sync with asset markets, acting according to what the market has priced in.

However, the Fed’s decisions are not purely inflation-oriented; they take into account labor market conditions as well.

Given these indicators, we believe the Fed will likely push through with the rate hike come July’s meeting.

2) Labor Hoarding Is Contributing to The Resiliency of The U.S. Economy

While the US Total Labor Force SA is trailing behind the pre-pandemic 2009-2019 trend, we have seen the Gross Domestic Income regain the trend shortly after the pandemic concluded.

This disparity tells us that there is an abundance of money in the economy but an inadequate labor force to meet the demand for goods and services.

Additionally, since March 2020, we have experienced labor demand outpace supply, with a staggering 3.9 million more in demand compared to available labor.

This excess demand for labor is causing labor hoarding, further strengthening the resilience of the U.S. economy.

3) We Are In A Liquidity Cycle Upturn; The Global Liquidity Cycle Bottomed In Fall of Last Year

Our 42 Macro Global Liquidity proxy, a sum of global central bank balance sheets, global broad money supply, and global FX reserves minus gold, shows a declining trend in recent months.

However, we believe the liquidity cycle bottomed last fall, and we are currently in the midst of a likely 2.5-year upswing.

Although we may see some turbulence over the next few quarters, Bitcoin, in this environment, could perform exceptionally well, pushing it above the $100,000 level by the end of next year.

In between now and then, we still anticipate a recession will commence in the US economy in the next two to three quarters, likely causing risk assets to fall as the Phase 2 credit cycle downturn sets in – a scenario that we believe has not been priced into the market yet.

We continue to believe risk assets will squeeze higher and peak in Q4 or Q1 of next year.

#respectthexaxis

That’s a wrap!
If you found this thread helpful, go to www.42macro.com/appearances to unlock actionable, hedge-fund caliber investment insights and have a great day!

Is It Time to Go Risk On?

Is It Time to Go Risk On?

Last week, Darius joined @maggielake from @realvision to discuss #Inflation, the U.S. Consumer, and more.

In case you missed it, here are three takeaways from the interview that are important for your portfolio:

1) Consumer Confidence Is Increasing, And The Consumer Economy Is Resilient 

With the University of Michigan Consumer Sentiment Index ticking up by a substantial 8.2 points to 72.6 this month, we are seeing the highest level of consumer confidence since September 2021. 

This noteworthy monthly increase represents the most rapid rise since the winter of 2005. 

The main contributor to this surge in confidence and the ongoing resilience of the consumer economy has been immaculate disinflation.

2) Immaculate Disinflation Has Caused Consumers to Believe Prices Will Continue to Decline Over The Next Year

The recent period of immaculate disinflation is leading consumers to anticipate a continued decrease in prices over the year ahead. 

Despite a slight uptick in the UMich Expected Changes in Prices Index to 3.4, it is significantly down from the 5.5 level a year ago. 

This deflationary anticipation is boosting consumers’ expectations of their financial situation, with the UMich Expected Change in Financial Situation in a Year data recording an eight percent month-over-month increase – the highest since July 2021. 

Essentially, immaculate disinflation is bolstering consumer incomes, both real and expected.

3) The US Economy Has Been Resilient

This resilience can be attributed to a variety of factors, including: 

That’s a wrap!

If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!

What’s Propping Up The US Consumer?

Last week, Darius joined Maggie Lake from Real Vision to discuss Rate Hikes, Inflation, the Stock Market, and more.

In case you missed it, here are five takeaways from the interview every investor needs to know: 

1) The Market Believes The Fed Is Done Hiking. We Are Fading That View. 

Currently, money markets are pricing in the assumption that future inflation data will force the Fed to pause at their July meeting.

Moreover, money markets are pricing in twice as much easing over the next two years by the Fed as they are the ECB (Fed: ~200 basis points; ECB: ~100 basis points) 

We believe this is unlikely because 1) the European economy is already in recession, and 2) the European inflation cycle tends to lag the US by two quarters; as a result, they are heading into the most disinflationary part of their Inflation Cycle in 2H23. 

While it may not occur in July due to a likely dovish June CPI release, we expect the Fed to continue to raise rates in the coming months. 

Consequently, we foresee the dollar grinding higher over the medium term. 

2) We Expect A Series of Upside Inflation Surprises Throughout 2023

Throughout the year, erroneous forecasts have caused investor consensus to roll forward the recession starting point; now, consensus estimates call for the recession to begin in Q3. 

However, inflation tends to break down 6-8 months after the recession starts – it is the most lagging indicator of the US Business Cycle. 

As a result, we believe we will not see any further significant disinflation after the June CPI release without a substantial drawdown in the labor market.

3) A Variety of Factors Are Propping Up The Consumer

We are seeing a wide range of conditions still propping up the US consumer:

4) The Phase 2 Credit Cycle Downturn Is Ahead of Us

We believe the recession is still ahead of us.

Since the Great Depression, EVERY recession has had a market crash associated with it as we price in the downturn in the credit cycle. 

In addition, on a median basis, markets tend to peak a month before the lowest point in the unemployment rate. 

So, we typically see degradation in the labor market and a dip in the stock market simultaneously. 

That means investors who share our longer-term (6-12mos) bearish outlook for the stock market must avoid expressing that view with actual trades until we are much closer to the start of recession. Since last fall, we have identified 4Q23 as the quarter with the highest probability of seeing a recession commence in the US economy. The second highest probability is 1Q24. 

5) The Stock Market Is Likely Nearing A Local Top 

This stock market rally has caught many investors off-guard; most fund managers are hastily rushing to minimize their YTD underperformance.

As a result, the rally can largely be explained by investors chasing the market higher, further squeezing Bears. 

Despite the recent uptrend, we advise against chasing stocks now.

We expect a correction in the near term for a variety of fundamental (e.g., declining US and global liquidity) and technical (e.g., the passage of a large, call-heavy OPEX should reverse flows) reasons. 

That’s a wrap! 

If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!

Whose portfolios are at risk over the next six months? The bulls or the bears?

1) The Bond markets are pricing in significant Federal Reserve easing in the coming 12-18 months.

In addition, the Fed Funds futures show easing is likely to start as early as November of this year.

But, our view on liquidity and factors in the real economy show that market positioning should change over the medium term.

As a result, we expect to see an increase in bond market volatility over the next quarter or two before we get into a recession.

2) The US consumer has been resilient.

Real PCE, which measures the value of goods and services purchased by households in the US, adjusted for inflation, is growing at twice its pre-covid trend.

Real Income is also growing at a three-month annualized rate of 7.6%.

The uptick in real PCE and Income signals increased demand for goods and services. This increase in demand can lead to higher prices, causing inflation to persist. 

So, a resilient US consumer means sticky inflation.

3) The recession is likely to be delayed relative to investor consensus.

Many investors have been calling for a recession for over a year.

On top of that, many analysts are predicting negative GDP growth in the second quarter of the year.

But, our research shows the economy is resilient and will likely stay resilient until at least Q4.

And this delay could trap both bulls and bears, leading to significant volatility in both the stock and bond markets.

4) The AI bubble will eventually meet the wrong part of the Liquidity cycle.

The rise of AI is similar to the internet boom in the early 2000s. We could see a similar blow-off top in late-2023.

And while emerging technologies bring about significant societal changes, they don’t prevent market downturns. Investors would be wise to sell into strength later this year.

5) Is the bad news priced in? Are markets forward-looking?

We’ve backtested asset markets extensively and found that markets only look 2-3 months ahead at most.

Despite what people think, markets are more reactive than predictive.

And they’re most reactive to changing liquidity conditions. Since 2009, equity markets have been highly correlated to global liquidity.

Liquidity drives markets, and we believe the recovery in liquidity might not be as linear as many investors believe.

6) We expect a negative liquidity backdrop over the next few months.

We’ve probably seen a medium-term high in liquidity. 

The expected increase in the Treasury General Account and the return to net coupon issuance by the US Treasury are negative for liquidity. 

As a result, the Dollar could trend higher in the near term, harming #Bitcoin and other risk assets. 


That’s a wrap! 
If you found this article helpful, go to https://42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights.

Have a great day