If you’ve been following the data — like we’ve been doing here at Moneyball Economics — then today’s market moves should come as no surprise to you…
Because there’s a whole world of investors out there who haven’t been keeping up with the transforming economy, and those folks are suddenly finding themselves behind the eight-ball on one of decade’s biggest transitions.
Let’s get into it:
Video transcript:
Welcome to Moneyball Economics.
It’s Friday and I am expecting a very volatile day in the markets because payrolls just came out and they came out blistering hot, almost 180,000 and that’s about 100,000 more people hired in the month of May than consensus expected.
As a result, all the narratives out there tied to interest rates and possible cuts or possible hikes have shifted…
It’s an inflection point the markets have to reposition, but let me give you some background before we dive into that. Every month this year, with only one exception, February, we have seen payrolls grow by 150,000. Plus or minus 150,000 is a number that correlates to a strong economy, not a slightly strong economy, but a strong economy.
Today’s payrolls came out not just nearly 180,000, but prior payrolls were raised 93,000. And so as a result, if you’re sitting at the Federal Reserve and you’re contemplating what to do with rate cuts today, just put a stake in the heart of any rate cut potential whatsoever.
You do not cut rates when payrolls are this strong.
OK, So what does that mean for interest rates going forward?
Well, that is exactly what the markets are trying to digest…
You see at this stage, with inflation moving up and payrolls staying consistently strong, you start to talk about rate hikes. And this is exactly what I’ve been talking about since late last year, that the US economy would be strengthening, that we would, if we saw a rate cut, it would have come and gone by April.
And instead we should be talking rate hikes.
And that, my friends, is exactly what the markets are contemplating now.
Not just will we see rate hikes, but when, however, there’s a little bit of a gotcha here. See, today’s results are fudged, they’re distorted. And I want to share with you a little bit of the behind the scenes stuff.
You see, we take these raw numbers every month and adjust them for seasonal fluctuation. So for example, in May, we get a strong number of people being hired every year because the weather is great, you’re outside, you’re building homes, boom, construction hires, hey, people are going out, the weather is great, they want to go out eating and drinking, boom, a lot of restaurant and bars are hiring and so on and so forth.
And so we offset that raw number that happens every year with an adjustment that says, yeah, but every year we get this. And so we’re going to kind of back out that every year seasonal hiring because we just want to focus on what makes this special.
And this is where they got a little crazy…
You see, last month I pointed out that those seasonal adjustments were holding back payrolls that for some reason the, the math that was driving seasonal adjustments made things a little bit more bearish by about 50,000.
You can see that in this chart. I’m looking at the trailing 12 months of seasonal adjustments because over time it’s supposed to net out.
See, over time I’m going to goose the numbers up when they’re seasonally low and I’m going to pull them down when they’re, you know, we’re doing a lot of hiring. But over the course of the year, over the course of 12 months, they should pretty much net out to 0.
Not exactly, but in general.
And as you can see in this chart that looks at that 12 month trailing seasonal adjustment in April, it was really bearish holding down payrolls by about 50,000. Well, Fast forward in just one month, we’re seeing that they’re pushing up payrolls by a crazy extra 50,000 from -50 to plus 50.
That’s right…
This month, the reason we got that almost 180,000 number because 100,000 of it was extra love coming from the seasonal adjustments.
What I’m saying is, in fact, May was light. And don’t take my word for it, Let’s look at the raw numbers themselves. This year, May hiring at the raw private payroll number level was the same as last year and the same as the prior year.
So every year in May, we basically hired the same number of people. But that’s not what we report on the adjusted level. As you can see on the adjusted level it’s a lot higher by about 100,000.
So it’s an artificial number.
What does this mean, big picture, looking at the headline number, the markets going to be spooked. They’re going to be spooked because every month it’s been signaling strength in the labor markets, which means no rate cuts.
However, what’s really going on this month is employers paused their hiring just like they did last year and for exactly the same reason. Uncertainty. Last year the uncertainty were tariffs. This year the uncertainty is the Iran oil impact. Employers stepped off the gas in May.
It’s just not showing up in that headline number. When is it going to show up, next month?
So we come to next month when we’re looking at the June hiring and we’ve got this skewed seasonal adjustment that has to reverse. So we’re talking about a 50K headwind on top of slower hiring. So next month, guess what, We’re going to wake up, we’re going to get another number that comes out and all of a sudden it’s going to look jittery.
This month, though, was more important because this is when we have a new Federal Reserve governor and this is when the markets are trying to determine what really is going on. And we’re going to start to see more and more signs this month that the economy is strong.
In other words, the markets are going to start factoring in rate hikes, and that is bad for high tech investments.
They don’t like rate hikes. And it’s terrible for the bond market. And it signifies a strong dollar and all the things that come with that.
Gold, you’re going down.
Bitcoin, you’re going down.
What we have is a problem because Trump doesn’t want any of this. He wants rate cuts. He wants a weak dollar. Get ready for a very volatile summer folks as the data zigs and zags and the problem is it’s zigging and zagging because of fudging U the data.
Nevertheless, we’re prepared.
We’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics