The financial markets experienced a rollercoaster of emotions last week, with concerns over the upcoming employment report causing indexes to languish. However, after Friday morning’s seemingly strong employment report, markets breathed a sigh of relief and reversed some of the week’s losses. Despite this, the week still ended with lower prices in both equity and fixed income markets, with the Nasdaq down 0.8%, the S&P 500 down 1.0%, and the Dow Jones Industrials down 2.3%. This underperformance of the Dow Jones Industrials may be attributed to issues in the manufacturing sector that have been hinted at for several months.
The Employment Quandary
The discrepancy between the Non-Farm Payrolls (NFP) and the Quarterly Census of Employment and Wages (QCEW) data has raised eyebrows. The divergence between the two reports, with NFP showing five million more jobs than QCEW, has led to questions about the accuracy of the NFP numbers. Additionally, the reliance on the Birth/Death (B/D) model to adjust NFP numbers has raised concerns, with nearly half of NFP jobs in the past year attributed to this adjustment. The data from the QCEW report suggests a different picture, with full-time jobs decreasing while part-time jobs are on the rise, indicating potential weaknesses in the economy.
More on the Oncoming CRE/Banking Crisis
The looming Commercial Real Estate (CRE) loan crisis is a cause for concern, with leveraged loan delinquencies exceeding 6% and a rise in CRE foreclosures. Banks hold a significant portion of CRE debt, and as foreclosures increase, loan loss reserves are expected to rise, impacting bank earnings and capital. The potential for a banking crisis is evident, with the Federal Reserve likely to intervene if financial markets become disorderly. The spread of the CRE crisis could lead to an inevitable recession.
Inflation and The Fed
The Federal Reserve has emphasized the need for more progress on inflation before considering rate cuts, leading to an increase in interest rates. The 10-Year Treasury yield has risen significantly, reflecting market expectations. However, concerns about inflation may be unfounded, as rent increases, a significant component of the Consumer Price Index (CPI), have been negative since last May. Despite Fed Chair Powell’s hints at rate cuts, market odds for a rate cut in June are uncertain.
Final Thoughts
The employment numbers, while seemingly strong, raise questions about their reliability, especially with discrepancies between NFP and QCEW data. The growing CRE issues and potential banking crisis pose challenges for the financial system, with the Fed likely to intervene if necessary. While interest rates have risen, concerns about inflation may be overblown, with falling rents expected to have a neutral to negative impact on CPI inflation. Overall, the economic landscape remains uncertain, with various factors influencing market dynamics and policy decisions.
