By Benjamin Picton, Senior Macro Strategist at Rabobank
The Beatings Will Continue Until Morale Improves
Another day, another selloff for bonds and equities. Duration was unpopular again as the NASDAQ fell 1.57%, while the Dow Jones and Euro Stoxx were down 1.14% and 0.92% respectively. Brent crude was up 0.72%, 10-year Treasury yields were up a smidgen (but nothing like the 8-10 point moves that we have become accustomed to in recent days) and 10y bund yields rose 1bp. You can hardly blame traders for being a little bit gloomy yesterday as the flow of data wasn’t especially conducive to optimism. US new home sales were down 64,000 from July to August, and about 23,000 lower than expected by the Bloomberg survey. Prices, meanwhile, recorded a rise of 0.8% in July vs predictions of just 0.4%, which was the gain in June. So, higher prices and fewer buyers.
The Conference Board’s consumer survey was more of a mixed bag. The overall index slipped from 108.7 in August to 103 in September. That was worse than the 105.5 expected by surveyed analysts, but the ‘present situation’ actually rose to 147.1 and the prior reading was revised higher, too. The Richmond Fed manufacturing index was surprisingly strong at +5 (compared to -7 in August), but their gauge of business conditions slipped from +1 last month to -5 and the Dallas Fed’s services activity index tilted more negative to -8.6. So, good now, bad later?
The improvement in manufacturing aligns with the trend in the ISM surveys, which seems to show that the bottom is in and that the economy is gathering pace. Perhaps that shouldn’t come as a surprise given the largesse splashed around by the Biden Administration via the Inflation Reduction Act and the CHIPS Act, or the broader trend towards reshoring supply chains as ‘decoupling’ shrinks global trade volumes at the fastest pace since the early months of the pandemic.
The protectionist trend and generationally tight labor markets has presented an opportunity for organized labor to win back some ground from corporate interests. We are seeing this play out in the United Auto Workers strikes at the moment. Public opinion seems to be shifting behind the workers whose demands for wage increases of up to 40% maybe aren’t all that unreasonable given that the *best* paid amongst them only make about $66k a year (less than the average American household income), while the CEOs of Ford, GM and Stellantis are pulling in salaries of at least $21 million each. Lower paid auto workers’ annual wages are less than the cost of an entry-level Ford F150, one of America’s best-selling passenger vehicles. Henry Ford, who famously wanted his workers to be sufficiently well-paid to be able to buy his cars, must be rolling in his grave.
We’ve been banging this drum for a while now, but labor versus capital is back. That’s might cause some headaches for central bankers, because rising days lost to industrial action is a further supply-side constraint (on top of all the other supply-side constraints) and rising real wages in the absence of meaningful productivity gains means increased unit labour costs. All of that is inflationary. Don’t expect any help to come from politicians, either. Both Biden and Trump are courting organised labour in rustbelt states that will again be the key to victory in the Presidential election next year, and everyone but Mike Pence seems to understand at this point that Reaganism is out of vogue.
The Fed’s Neel Kashkari must have some sense of the risk, because he said overnight that he expects the Fed will raise rates once more this year and he puts a “40% probability on a scenario where the Fed will have to raise rates significantly higher to beat inflation”! Not to be outdone, JP Morgan’s Jamie Dimon yesterday speculated about a worst case world of a 7% Fed Funds rate (!!), while the ECB’s Robert Holzmann was more circumspect in suggesting that it was unclear whether ECB policy rates have peaked or not.
Meanwhile, the NY Fed’s measure of 10y Treasury term premia has turned positive for the first time since 2021 and, as our Global Strategist Michael Every has pointed out in recent days, it could have an awful lot further to rise if it is to approach anything like a long-run average. This comes at an interesting time because US student loan repayments are due to resume on October 1st for the first time since March of 2020, US credit card balances have now exceeded $1 trillion, credit card losses are rising at the fastest pace since the GFC and Bloomberg reports that most US households have now burned through all of their pandemic-era excess savings (and then some). This all sounds pretty bearish for the consumer economy, enough so that our own Senior US Strategist Philip Marey is forecasting a recession to begin in the USA in the final quarter of the year.
We haven’t mentioned energy prices yet, or the worried mutterings over Treasury basis trades, or what must be happening to hold-to-maturity bond portfolios. Nevertheless, it’s fair to say that the mood is wary and the recent trend is for market pricing to become more pessimistic by the day. Let’s hope the data can continue to surprise on the upside. But for now, it seems the beatings will continue until morale improves.
