Stagflation Incoming?!
Markets gapped down aggressively on Tuesday morning, as expected due to the tariff appeals discussed in last weeks newsletter.
However, through the week markets rallied back to close the gap, and print a new all time high intraday on Friday.
The S&P closed up 1.5% from Tuesday’s open, but back under the prior all time high level at 649.5.
There are huge dislocations in terms of the fundamental story leaning bearish or pesimistic for the economy, however technical data leans bullish for price. As we break down the two stories in this newsletter, just remember that only price pays.
Cracks Emerge (or just worsen…) In Labor
Data released this week continues to paint the picture of a weakening labor market where hiring has come to a grinding halt, but layoffs are not accelerating.
After another round of revisions to the data, the June non-farm payroll number flipped negative.
There were 13k jobs lost after the second revision vs the prior data suggesting initially 147k jobs added then a first revision to only 14k jobs added.
This is the first negative non-farm number since 2020…
Job loss was not sustained through the month of July, nor August, however contraction and a clear slowdown has taken place.
Oh, and don’t forget… we get annual revisions to NFP on Tuesday morning at 10am EST.
The next inflection point for the labor situation is monitoring layoffs for a meaningful uptick. The Fed’s Beige Book released on September 3rd makes note that in two districts, talks of layoffs are increasing.
Looking at the actual rate of layoffs, we can see a small uptrend building, but nothing to the magnitude that would cause a ‘spike’ or notable panic moment for the Fed.
When I say panic, I mean lowering rates 200 basis points overnight, not the anticipated cut coming in September.
One of the precursors for layoffs intensifying tends to be residential construction employment. Over the last three months we have seen a steady decline, along side general employment weakness. This is a reflection of tighter monetary policy finally catching up to and hitting the most sensitive of sectors.
The picture isn’t looking good for fresh graduates either with the unemployment rate of people under age 25 breaching 10.5%.
Generally this cohort isn’t responsible for large consumer spending so we won’t put that under a microscope.
It is a good indication however, of labor tightness. It would suggest that companies, at the margin, are slowing down hiring for entry level experience roles
Implications for Inflation
Since the tariff implementation in April, we’ve been forecasting an inflationary shock to hit the market one way or another. Wether from a renewed uptick in inflation, or the failure of tight policy to continue pushing inflation lower towards the 2% target.
If labor is weaker than previously thought, and forecasts are for continued weakness, its worth reconsidering this stance.
The Beige Book notes in its ‘Prices’ section that some companies are losing pricing power, and having to in some cases lower prices to maintain business even as input costs remain elevated… and are still elevating.
When it comes to interest rates, the long end of the curve had remained stubbornly high. The 30yr looked poised for a breakout over 5% and the 10yr refused to breakdown below 4.25%.
This was a major input to the persistent inflation thesis.
As of Friday’s labor report, the long end has started backing off, and the ratio of IEF:TLT has produced a failed breakout signal.
Suddenly, we find ourselves back at stagflation…
We’ll see how and if this translates to margin compression in earnings as we move forward, but for now the technical picture would prevent aggressively changing stance to bearish.
Continue reading to see why!
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Check out this recording for a taste of what each morning session is like: 07/09 Live Squawk
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Broad Market Analysis
SPY – Weekly
Bar by bar Tuesday’s gap down made a LL, yet sellers couldn’t set a LH. Friday’s gap up sets a HH, yet buyers couldn’t close over prior bar range. Trend remains up. HL available over 613. Over all fibs & aVWAPs.
SPY – Daily
Markets gapped to a new ATH on Friday, and although not sustained, price can still make a HL. Ideally that is over 642.2. Recaptures of 649.25 lead to more new highs. Daily trend reverses to down if 634 breaks.
SPY – Hourly
Pathing ideas hinge upon the daily importance levels. Base case is likely green / white. Red seems like lower odds given the supporting evidence and strength of the trend through last week. Pullbacks are normal, and higher lows should be welcome.
Market Internals
Focus on Friday, and the lack of sell side internals following through to the downside when the market moved lower via labor report.
Really seems more like a liquidation break than anything else. (these are bullish for markets as they take short term momentum sellers out of the market should we get back to the open)
Market Profile
We see a ‘B’ shaped profile indicative of long liquidation from the highs. Value is overlapping to down, and PoC is lower. Generally it just looks like overaggressive buyers at the Thursday close were corrected and now we seek a base.
Friday VAH is confluence with ‘I’ period single prints from Thursday. Mechanical level there at 6491s.
Gold
Gold is a warning sign that is worth considering here. Massive relative strength as displayed by the ratio below. Generally pullbacks over 3532 should be considered bullish for the metal, and a warning for equities as a defensive posture emerging. Mind that this is only one data point in the analysis.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
Market moving data every morning except for Monday… don’t get blindsided.
Top watches: ORCL, RBRK, ADBE
Swing Stock Scans
ABBV – Daily
Bull flag with high and tight consolidation as markets fall into rotation. Looking for a break of the highs to get into the pivot high at 217. Not interested if the daily 20 SMA (orange) breaks.
BLDR – Daily
Large rounded bottom with a day 1 breakout on Friday. Looking for followthrough with the prospect of rate cuts remaining on the radar post weak labor report. Pullbacks that sustain over 144.75 area look decent for longs should we see buyers step up.
BYD – Daily
Ascending triangle at the all time high. Watching for moves over 87.65 for continuation into blue skies. Interested as long as the trend line continues to hold.