This week’s data was consistent with my current assessment of general conditions; an overall deteriorating macro setup, although not to the point where we can make the recession call – at least not in the U.S..
· Unemployment rate: 3.5% vs 3.7% expected
· Private payrolls: +114k vs +135k expected
· Manufacturing payrolls: -2k vs +3k expected
· LF Participation Rate: 63.2% vs 63.1% expected
· Average hourly earnings: m/m: 0% vs +0.3% expected
· Average hourly earnings: y/y: +2.9% vs +3.2% expected
· Average workweek: 34.4 hrs vs 34.4 hrs expected
Again, the above reflects a general weakening (on balance), but definitely not recessionary conditions.
Of course employment statistics are more or less lagging, or coincident, indicators, while, for example, the ISM surveys (manufacturing in recession, services still expanding but at a slower pace) are leading indicators.
The PWA Index this week moved back into the red with a -4.65 macro score. However, 100% of the 6.98-point decline occurred within the highly-volatile financial markets subindex, which broke down severely in its breadth and relative strength measures.
While we have to take our own macro score very seriously, and there’s no doubt that it points to accelerating recession risk, the relative strength of the consumer, as well as the services sector make an all-in recession call premature.
Bottom line: Fundamentally-speaking, present general conditions demand that we remain guarded and keep client portfolios sufficiently hedged for the time being.
Technically-speaking, the longer-term equity market charts remain very concerning, thus confirming/justifying our willingness to – via options collars – forego some of the upside from here to limit the downside should equities roll over in a big way.
As the market closes out the week (we’re halfway through Friday’s session), U.S. equities are in rally mode, but not (at this point) enough to salvage what was a tough week.
The fact that bonds are finishing out the week on a high note as well suggests that yesterday’s and today’s rally is largely about prospects for a more accommodative Fed (given the weak data of late) going forward. I.e., for now bad-news-is-good-news is back…
Lastly, keep in mind, while my base case is presently that the next big move in the market is likely to be lower, I’ve maintained that a push to fresh highs in the meantime is very much in the cards as well.
Catalysts for new highs sooner than later would be good news out of next week’s trade talks, dovish Fed commentary and/or better than expected Q3 earnings reports. Of course any one of those going south would definitely put that very short-term thesis to the test…
Have a nice weekend!