Andy West, PhD Profile picture
Feb 5 17 tweets 6 min read
WHATS HAPPENING WITH US EMPLOYMENT / PAYROLLS and implications
a thread:

1/x

After a +517k Jan 23 payrolls & resilient employment mth after mth despite a year of rate hikes, whats really happening & does it mean soft landing?

read on

#macro #unemployment #stocks $SPY $QQQ
2/x I'm not delving into statistical adjustments, this is about the real backdrop & whats driving overall trends. From that I'll draw some clarifying conclusions.

Here's the recent payrolls numbers charted. The trend shows payrolls normalizing down from elevated levels w/ chop
3/x Why were they elevated at the beginning of '22? Its all about the re-hiring of workers laid off during COVID. This is still on going.

The Chart shows US Total Employed. The US shed ~15% of its workforce as COVID hit and only recently surpassed 2019 levels, now +2% vs then.
4/x Has re-hiring finished? NO and thats what is continually surprising the economists payrolls forecasts.

Trend can be looked at many ways. Simplistically, the past employment trend could put normal employment at 159m, +4m workers higher than now
5/x If we look at it in GDP terms, then we can see a similar dynamic

This chart shows real GDP per employed person & highlights that its still elevated above long term trends following the COVID handouts, fiscal spend and monetary looseness

Companies are still running...
6/x

...understaffed relative to their output/sales but with GDP/employed normalizing down since 2021, its likely this needs to decline more before businesses feel real pressure (due to margins/earnings) to fire workers.

Which industries are still in hiring mode?
7/x Government, Retail and Leisure/hospitality are the 3 areas still well under 2019 employment levels. Leisure was the big one driving ~30% of Jan's payrolls gain. Retail is not really net hiring again but govt is slowly.
8/x How does this compare to international employment trends?

Countries like Australia took a different approach to employment over COVID with job protection schemes that reduced layoffs and hastened rehiring.

Here's where Australia is now as an example reinforcing that the...
9/x US has more re-hiring to go. Australian total employment is +6% vs 2019 pre COVID levels vs the US at +2%

This is because Australia only shed 7% of its workforce & as "Jobkeeper" was instigated quickly, rehired those workers before they could move, emigrate, retire etc.
10/x Back to the US however and despite the rehiring trend post COVID still ongoing, we do still see evidence of the expected economic cycle playing out:

Contraction in the NAHB Home index, ISM manufacturing, ISM services and yield curve inversion

I always like this chart...
11/x which shows the cyclical forces at play that would be expected in a rate hike cycle. Rates, up, home building tails off followed by cyclical industry unemployment.

In this cycle, we simply need to understand that the COVID rehiring dynamic is at play delaying the impact...
12/x of the rate cycle on employment statistics.

When we see the intersection of the rehiring dynamic having played out, coupled with full lagged impacts of the rate hikes, then I'd expect "normal" recessionary trends to start to be seen...
13/x Unemployment rises, spending & GDP falls, the Fed cuts rates, corporate earnings fall, stocks fall.

The hardest part is knowing when that will be. Inflation is still supporting nominal earnings but it is receding.

Recent high freq data suggests the CPI glide path down...
14/x may be about to slow. We may see YoY CPI for Jan in line with December & only a small decline in Feb data given food and fuel prices rising.

CPI declines will likely be greater in Mar & April data as that cycles the worst from the prior year. But...

15/x we need to watch oil prices and any China consumption effects on commodities closely for threats of a new inflation wave that results in more rate hikes.

Meanwhile, it may take 9+ mths for that COVID rehiring of another 3-4m jobs to play out behind the scenes

So...
16/x

DON't be surprised if the term "soft-landing" remains around for a while before the rug being pulled in Q3 or Q4 this year.

If this is useful insight, consider pre-registering for the HedgQuarters.com platform launch this year.

Macro to micro connecting the dots
17/17 As a P.S., if you're wondering where all this labor can come from with unemployment at decade lows, it has to be from the participation rate normalizing upwards.

Pre COVID it was 63.3%, before the GFC 66%. Today 62.4%.

As savings disappear, people come out of retirement.

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More from @andycwest

Feb 3
#SPX $SPY Breadth Ratio update 🧵:

This situation continues to get more intriguing. After the rally the last 2 days, I expected this signal to be resoundingly rejected

But the % of stocks > their 20 day MA relative to those above 200 MA has fallen below 1... 1/4
$QQQ #stocks Image
2/4 Whats this really showing?

Individual components of the ratio shown below

An increasing % of #stocks are above their 200 MA as expected in a rally, but the % above their 20 MA is flat potentially presaging declining momentum of the rally...

$SPY $QQQ #SPX Image
3/5 When the % > 200MA is very high like now, but the % > 20 day MA starts to weaken, then we typically conclude the rally is in late stage and at risk

This may not be yet - as seen in orange the % > 20DMA can fluctuate at highs for a while. But given some weakening 2day...
Read 5 tweets
Dec 20, 2022
PREPARE FOR HIGHER VOLATILITY:

Important 🧵:

We’ve had a bear mkt rally which has now failed and partially unwound. Brief Santa rally or not, the following chart pack tells a clear story of impending volatility:

#macro #stocks $SPY $QQQ
Financial conditions:

This chart isn’t a mirror image - it’s the GS Fin Cond index against the #SPX. I’ve been tweeting updates on this for 6 mths because when conditions tighten, #stocks roll. Once again the Fed and now BoJ have triggered the tightening needed for inflation 🧯
Yields:

10 year yields are on the rise again with added fuel from the BoJ pivot yesterday. As the benchmark the risk free rate, this is negative for #SPX in the near term
Read 9 tweets
Dec 14, 2022
#Fed day: the down/up reaction of #stocks shows something here for both hawks & doves.

For me (looking ahead), the Fed faces a dilemma in 1H '23. Cool/negative goods/energy inflation but still strong wage gains given tight labor.

Headline CPI...
#macro
will fall (particularly in Q1), potentially to even ~5% by March data, but wage gains will see medium term services & core inflation drivers inconsistent in the Fed's lens with a sustainable return to 2-3% target.

So Mr Mkt is saying based on history, the Fed never keeps...
rates at peak for long (ie the market assumes rate cuts soon after the peak).

But we need to consider that perhaps this time, with the labor pool down due to COVID and structural labor tightness, the #Fed may be FORCED to keep rates at the peak plateau for longer...
Read 10 tweets
Nov 14, 2022
Updated Inflation, rates outlook & prospects for #bonds and #stocks:

We're moving into a new phase of disinflation from here. This is what I expect to see unfold: Update 🧵:

#macro $SPY $QQQ #inflation
Back in early August I wrote that we were about to experience a surge in core inflation into end Q3.

At the time #stocks had rallied strongly and this presaged another pullback given it meant the #Fed had to be more hawkish.

I was a touch early w/ mths:
This played out and I've posted my multi-factor inflation model for US CPI previously. It shows #inflation moderating quickly in mid 2023:

Fair to say this generates skepticism. The narrative is once CPI >5% it stays there for > 2 years. Well where to now? Image
Read 13 tweets
Oct 26, 2022
$GOOGL: I honestly don't even know where to start in breaking down this disaster of a quarter from $GOOG (and no, I'm NOT short, except by way of sector ETF).

Read the usual bulge bracket broker reports and you'd think this is ok. Its NOT and here's why

a 🧵:
$QQQ $SPY
First - is this rev growth a pass or fail? Simply - BIG fail. Here's the internet advertising price growth chart from HedgQuarter's Info Tech Sector Drivers dashboard

Ad prices are still up 10-20% YoY so the 10% rev growth for search ads & 3.8% for YouTube is abysmal.
2nd - are costs being managed? If you were the owner of a business whose mgt grew its headcount by 20% while in the last 2 Qtrs your net revs grew 12% & 7%, I think you'd have a few choice words.

$GOOG mgt bought their own B/S and chowed down. They thought it would last 4ever
Read 6 tweets
Oct 19, 2022
PART 2 of 2 - Bond crash implications for stocks:

Why does the #bonds crash signal further pressure for #stocks?
(& why do rate hikes take so long to show in earnings?)

Here I deal with general corporates, consumer & the banks:
$SPY $QQQ #macro
CORPORATES:

As cost of capital rises, the direct impact on corporate earnings starts small then builds. The direct impact of higher rates on corporate borrowings can be estimated to be only approx -2-3% on EPS extra each year due to termed out debt at past low rates. But
about 20% of debt gets refi’d each yr so this builds to a more material headwind over 12-24 mths.

WORKING CAPITAL EFFECTS

Working capital terms start to get tightened by companies as rates rise. Due to WC debt costs (mainly floating rates), companies are forced to offer
Read 21 tweets

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