How much longer will the Fed keep hammering stocks and pushing the market – and the US economy – lower?
That is the question every trader is asking now that the S&P has brushed against a bear market three times in just the past week and threatening to careen lower, especially as it now appears that the Fed has given up on a soft landing, and is willing to gamble everything to contain inflation, even if it means a hard-landing, which according to a SocGen strategist can only happen if rates rise to 4.5% or higher.
The answer is simple: now that Wall Street is convinced that inflation has peaked, both on the sellside (as this Goldman chart shows)…
… and the buyside, with the latest Fund Manager Survey showing a record 68% of respondents expect inflation to drop in coming quarters…
… with GDP on the verge of a technical recession (just one more negative quarter and you’re out), and with housing about to crater…
… only strong employment remains.
In other words, those who want to know when the Fed will capitulated on its market-crushing tightening are exclusively focused on negative inflections in the labor market, because as even Bank of America’s economists wrote last week (the note is available to professional subscribers), the Fed will be hard-pressed to drive inflation down towards its 2% target without raising the unemployment rate meaningfully, which in turn will require a significant downshift in labor demand. In other words, the Fed wants a mild recession (but certainly not a depression) to hammer labor demand and short-circuit the wage-price spiral.
So what data should traders be looking at? Well, job postings are perhaps the best leading indicator of unfilled labor demand. The official government source is the Job Openings and Labor Turnover Survey (JOLTS) from the BLS, which we profiled every month. As of March, the latest available data, there were a record 11.5M total job postings, nearly double the number of unemployed persons.
A drawback of JOLTS is that the data are rather lagged (it tracks one month behind the latest payrolls report) and, in the current environment, trends can change quickly. To get a more accurate answer,Bank of America has used data from Revelio labs on job postings to get a better sense of incremental labor demand in real-time. Unlike JOLTS, Revelio measures new instead of total job postings, which tracks total job postings closely with a correlation of 93%.
So here is the big news: in April, new job postings fell by 2.0M to 6.6M according to Revelio’s data. This is a huge deal as it represents the largest monthly drop in the available history going back to May 2019!
Furthermore, the decline was broad-based with 146 of the 147 industries – virtually everyone – reported by Revelio recording a sequential decline in new postings. Moreover, the share of industries with a Y/Y decline in new postings rose to 22.5%, highest since last Feb.
In short, as BofA economist Stephene Juneau writes, the drop in job postings is a sign that labor demand is beginning to cool, although there will be a distinct lag between the crack seen by such 3rd party data collectors as Revelio and the US Department of Labor (just like a year ago we warned that housing inflation was about to soar by looking not at lagging government housing data but real-time metrics from Apartment List and Zillow, see our June 2021 article “And Now Prices Are Really Soaring: June Rent Jump Is Biggest On Record“).
Furthermore, the gap between new postings and voluntary separations will likely narrow when we get the April data from JOLTS, but it is unlikely to close completely (unless the BLS kitchen sinks the April/May data ahead of the midterms). The upshot is that we will likely need to see new job postings fall much further in order to cool down the labor market, and subsequently wage and price pressures.
Fine, the skeptics will counter, “this is just one indicator. What about other real-time reads of the job market?”
Well, aside from the Revelio data, there are plenty of other signs of moderating labor demand. Consider the following:
- 1) The share of businesses planning to increase employment in the NFIB small business survey has fallen by 8% since December 2021 to 20% in April.
- 2) Challenger Job cuts increased by 6% Y/Y in April, the first annual increase in fifteen months.
- 3) In an ominous return to the “normlacy” that defined the stagnating Obama presidency, the number of workers with multiple jobs continues to pick up. This is the clearest indicator yet that the “Great Resignation” post-covid trends are now actively in retirement.
- 4) Even clearer proof that “unretirements” continue to rise is the latest data from Indeed, which shows that 3.3% of the workers who “retired” a year ago are once again employed.
5.) It’s not just Revelio seeing a drop in job posting. Bank of America’s own analysts (in this case in a note from Sara Senatore) show that job posting growth across restaurant categories decelerated sharply on a sequential basis. Job postings growth slowed most in Beverages – to +23% y/y from +268% in March. For the remaining categories, y/y growth in postings slowed most in Fast Food (-16% y/y vs +126% in Mar), followed by Full Service (-67% y/y vs +13% in Mar) and Fast Casual (-66% y/y vs +7% in Mar). In April, y/y growth in job postings for engineers increased for Beverages & Snacks and Fast Casual while Full Service categories and Fast Food postings growth decreased (the full BofA note is available to pro subs in the usual place) .
Last but not least, there is growing anecdotal evidence that the labor market just hit a brick wall, with the likes of Amazon, Facebook, Walmart, Target, and Netflix all recently giving negative guidance on employment. Indeed, last week, Bank of America’s trading desk called it “the end of the labor shortage” to wit:
“Did co’s double-order people? WMT and AMZN are the 2 biggest private employers… and both have made comments on their calls… on being “overstaffed.”
The desk’s conclusion: “the ‘labor shortage’ narrative officially died in the past week.” And from there to a spike in the unemployment rate and a collapse in wages it’s at most a few months. Which confirms what we (and Morgan Stanley and BofA’s Michael Hartnett) said previously: the recession will begin in the second half of 2022, with the Fed ending its rate hike cycle well ahead of schedule, and proceeding to cuts rates and launch its latest QE some time in early 2023.