A Math Mirage is Moving MOVE
CLUB/EDGE client post May 7th. Focus on my Spring "Warm Summer Housing Market" call.
» CLUB/EDGE client post Tuesday May 7th 9:03 AM
Coming into the week we saw markets continue to rise - gapping up on Monday - as it interprets the jobs data on Friday as bearish.
The April NFP came in at 175k, well below the expected 238k, and a marked slowdown from the March figure of 315k.
Average hourly earnings grew 0.2% last month, vs the expected 0.3%, helping bonds to catch a bid.
The unemployment rate ticked back up to 3.9%.
Over the last three months, AHE are up 2.8% compared to 4.8% YoY.
This data is consistent with 2% annual core PCE inflation.
With wage growth gradually declining, the Fed does not need further labor market loosening.
Volatility was crushed Friday on this announcement - opening and staying below my 14.49 monthly support/now resistance.
My SPX/QQQ $5200/$445 clearly coming into view.
Bonds stopped going down last Wednesday with QRA and FOMC easing and stayed solidly bid through Friday.
I still contend, above 4.688% in 10Y is bearish equities; below is not.
Both stocks and bonds continue to get bought.
And here's why:
The bulls interpret the Fed/Treasury put as the economy appears to be slowing down from the NFP data.
Fed cuts got pulled forward from December to September with 73% chance!
Remember, this is a moving target, but the point remains: Any bearish economic and/or inflation data will be interpreted by bulls as bullish stocks and bonds.
There is still way too much optimism around rate cuts.
What's The Trade?
My "Warm Summer Housing Market" call is in full view now.
MOVE is starting to move down, as I expected - from a pattern recognition and technical assessment.
Here's the macro narrative:
Morgan Stanley expects the three-month annualized rate of core PCE inflation to fall to 1.81% for the Dec. 2024 data released in January 2025, and the six-month annualized to fall to 1.96%. via MarketWatch
BUT... it is this expected dis-inflation impulse that is a math mirage.
Residual seasonality:
That is, the notion the seasonal adjustments from U.S. government statisticians aren’t being done properly, in a way that moves first-quarter numbers higher and rest of the year numbers down.
Residual seasonality isn’t a new thing, but what was a small observed factor from 2010 to 2019 has emerged as a giant one now.
To quantify the impact, Morgan Stanley employs a technique comparing the average annualized numbers for a quarter to the four-quarter average. For the preceding last two years, core PCE prices — the inflation numbers that mean the most to the Fed — have seen a giant 1.32 percentage point boost to first-quarter numbers that erodes as the year goes along.
This residual seasonality has shown up elsewhere, too — in the employment cost index series as well as unit labor cost data in the productivity numbers.
“When so many price metrics display residual seasonality and show a similar pattern of it strengthening, investors would be forgiven for gaining confidence that the pattern will continue in the coming year,” say the strategists.
Translation:
Regardless of whether the economy weakens, bond yields could still fall as inflation data disappoints and the #HFL (higher-for-longer) crowd and narrative is attacked.
I would contend, this math mirage will only last into the election at best.
But it will help my "Warm Summer Housing Market" call and potentially help keep stocks and bonds from any serious correction this summer.
For now, let's get through earnings season and NVDA May 22nd.