The Week in Charts (9/9/24)

View the video of this post here.

The Rate Cuts Are Coming!

The only question: how fast will they go down.

Join me for a big live show with YCharts this Thursday (September 12 @ 2pm EST) covering everything you need to know about the huge shift in Fed policy and its impact on markets/economy.

Register HERE to reserve your spot (if you can’t attend live, sign up to receive a replay).

The most important charts and themes in markets and investing…

1) The Cooling Labor Market

The US labor market is cooling. That much is clear. The big question is whether this is merely a normalization of supply and demand or a signal of an oncoming recession.

Let’s run through some of the signs of a slowdown:

• 99,000 private sector jobs were added in August, the weakest month for jobs growth since January 2021.

• There are now 7.67 million Job Openings in the US, the fewest since January 2021.

• The spread between Job Openings and Unemployment Persons in the US has moved down to 510k. That’s the smallest differential since April 2021, down from a peak of over 6 million in March 2022.

• US employers have announced 79,697 hiring plans so far this year, down 41% from the 135,980 plans recorded through August of last year. The YTD total is the lowest on record with data going back to 2005. The previous record low was in 2008 (80,387).

• US employers announced 75,891 job cuts in August. With the exception of 2020 (115,762 cuts), that was the highest August total since 2009 when 76,456 layoffs were recorded.

• 142,000 US jobs were added in August, below the consensus estimate of 160,000. June 2024 (-61,000) and July 2024 (-25,000) payrolls were revised down as well.

• Total jobs in the US increased 1.5% over the last year, the slowest growth rate since March 2021 and below the historical average of 2%.

2) The Longest Inversion in History Is Over

The cooling labor market is coinciding with another potential warning signal from the yield curve.

The longest yield curve inversion in history has ended with the 10-year Treasury yield (3.71%) now 6 bps above the 2-year yield (3.65%).

What does this mean for the economy?

Historically, the flip back to a positive sloping curve after a long inversion has occurred near the start of recessions:

-March 2007 flip back: recession began 10 months later, in January 2008.

-December 2000 flip back: recession began 4 months later, in April 2001.

-June 1989 flip back: recession began 13 months later, in August 1990.

-October 1981 flip back: recession began 2 months earlier, in August 1981.

-May 1980 flip back: recession began 3 months earlier, in February 1980.

But here’s where it gets interesting.

The yield curve remains highly inverted if we look at the shortest end of the curve, with the 3-month Treasury yield still exceeding the 10-year Treasury yield by over 1.4%. That curve has been negative for nearly two years.

When will that streak end?

Only after the Fed starts cutting rates, which is expected to begin in 9 days at the September 18 FOMC meeting. But the first rate cut is only anticipated to be 0.25% or 0.50%, hardly enough to un-invert the full yield curve. So unless the Fed starts aggressively cutting rates, the 10-year/3-month inversion will likely be with us for at least a few more months.

And if they do start aggressively cutting rates?

That would likely happen because the Fed is seeing signs of a incoming recession, with the flip back to positive territory occurring faster as a result.

So is a recession inevitable?

No. Nothing is inevitable when it comes to markets and the economy. It’s certainly possible that in hindsight this will prove to be a false positive. But given the track record, that would be a historical outlier. The odds seem to favor economic weakness ahead.

3) Bad News Is Bullish for Bonds

Fears about a cooling labor market and recession have been bullish for bonds, which hit another 52-week high last week. After the weak payroll report, the 10-year Treasury yield fell to 3.68%, its lowest level since June 2023.

As a result, the Aggregate Bond ETF ($AGG) is up nearly 10% over the past year, outpacing short-term Treasury bills ($BIL ETF) by over 4%.

What’s driving this move?

Expectations of lower rates to come. Bond investors continue to front-run the Fed in locking in higher longer-term yields before shorter-term yields are cut.

Market participants are now pricing more than 100 bps of rate cuts by the end of this year and another 125 bps of cuts by the end of next year. If they are correct, that would bring the Fed Funds Rate back down below 3%.

4) Another September Swoon or Something Bigger?

September has been the worst month for the US stock market historically, with an average return of -1.2% since 1928.

And it’s the only month that has seen positive returns less than 50% of the time.

The last 4 Septembers have all been negative:

-September 2023: -5%.

-September 2022: -9%.

-September 2021: -5%.

-September 2020: -4%.

And we’ve started off down this year as well, with the S&P 500 falling 4% last week.

5) A Defensive Rotation

There’s been a notable rotation within the equity markets over the past two months.

After surpassing the March 2000 relative strength high, the Tech sector has sharply underperformed.

The more cyclical Technology ($XLK) and Consumer Discretionary ($XLY) sectors are now underperforming the more defensive Utilities ($XLU) and Consumer Staples ($XLP) sectors on the year.

This is the opposite of the behavior we saw in 2023…

Within Tech, Nvidia has continued its post-earnings decline. And on September 3, its market cap fell $279 billion. That was the largest single day decline for any company in history.

The huge up and down swings in Nvidia’s market cap this year have been bigger than anything we’ve ever seen.

7) Dollar Store Downturn

Speaking of large moves, Dollar Tree ($DLTR) fell 22% last Thursday after cutting its full-year outlook, citing increasing pressures on consumers. That was its biggest daily decline since March 2001 and 3rd biggest in company history.

Dollar Tree is not the only discount retailer struggling this year, with huge losses in Dollar General, Five Below and Big Lots (which filed for bankruptcy today). One reason for their difficulties is increasing competition from Walmart ($WMT), which recently announced lower prices on more than 7,000 items. Walmart’s stock is at an all-time high, up 48% year-to-date.

8) Plummeting Prices at the Pump

Crude Oil ended the week at $67/barrel, its lowest level since June 2023 and 23% below its April high.

This should lead to continued declines in gas prices, which have already moved down to $3.30/gallon (national average), their lowest levels since February. A year ago gas prices were at $3.80/gallon.

9) A Few Interesting Stats..

a) There are now 497,000 401(k) millionaires at Fidelity alone, a record high and more than double the number from five years ago (see video discussion here).

b) The Fed’s balance sheet is now at its lowest level since October 2020, down $1.85 trillion from its peak in April 2022. How much more QT is needed to unwind all of the QE from March 2020 to April 2022? $2.95 trillion.

c) The ISM Manufacturing PMI has been below 50 (in contraction) for 21 out of the last 22 months. With data going back to 1948, that’s only happened one other time: 1989-91 (Recession occurred in 1990-91).

d) The largest publicly-traded supermarket chain (Kroger) has a net profit margin of 1.4% over the past year and 1.2% throughout its history. Is this evidence of price gouging (see video discussion here)?

e) The Nasdaq 100 has closed above its 200-day moving average for 375 consecutive trading days, the 5th longest uptrend in history.

And that’s all for this edition. Have a great week everyone!

-Charlie

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The post The Week in Charts (9/9/24) appeared first on Charlie Bilello’s Blog.