The Truth About 2025’s “Missing” Rate Cuts…

This is Moneyball Economics, I’m Andrew Zatlin.

And this week … no charts, no graphs, no numbers … just pure Zatlin talking about what’s going on in the economy and what you can expect this Friday when payrolls come out.

Let’s talk big picture. Okay, last month the market melted down. Now, at the time I said it was a glorious buying opportunity, and sure enough, as we’ve seen the past week, buying into the market was the right thing to do as it’s come back.

But why did it go down, and why is it coming back?

Let’s kind of take a minute here and talk about that. My overall view has been and continues to be based on the data. I’m seeing that the market hit kind of a pause. As we approached the election, we had election anxiety because Kamala was suddenly a player versus Biden. We also had the Fed delaying rate cuts saying they’re going to happen, and as a result, a lot of companies just sat on the sidelines waiting for those rate cuts.

Hey, look, we got to November, the election came and went. People got a little bit excited about Trump and I think the market went up a little bit too much because it was a short squeeze, basically. Alright, then we get to December and the Fed against this background of economic strength says, you know what? We’re do a rate cut now, but going forward, we’re not going to see a lot more rate cuts.

Now, what the Fed is saying is the economy’s doing really well and between you and me long term, that’s fantastic for the stock market. Short term, stock market had a little bit of a hissy fit. It did not take that very well. Add in the fact that any short squeeze that was going on ended, so there was a pullback in buying, and then you’ve got year-end window dressing, the companies locking in profits and so forth.

Look, the year did not end with a Santa rally, so it pushes into January. Going forward, the market is in a state where they don’t like economic strength. They really, really want to see rate cuts. They’re not going to get them. They’re not going to get them because this economy is going to be taking off. There’s going to be inflation. The Fed is not going to cut rates in the face of inflation.

Frankly, I don’t think they need to when I look at the labor data. So let’s talk labor data. But before we do, I also want to talk about this cool survey. It’s the ISM Procurement Management index, PMI. Alright. Basically it’s a soft survey.

Now we have two kinds of things that we can look at when we talk about the economy. We got hard data, what’s inflation, how many payrolls are added.

But then along the way, we also have these surveys, these we call ’em soft data surveys, and it’s kind of taking the pulse of what’s going on and the ISM instituted supply management, P-M-I-I-S-M-P-M-I … say it three times fast, I-S-M-P-M-I looks at the manufacturing world and it takes a look at what’s going on in terms of demand.

Are things heating up?

What’s the supply chain signaling?

And again, one of the challenges here is it’s always backwards looking.

In this case, we have a little taste of the December ISM and it’s saying there’s a lot of window shopping right now, but it’s also converting over from window shopping, kicking tires to actual commercial activity, meaning employment is shaping up strongly, business activity is shaping up strongly, but it’s not going to happen until we get into the new year.

Let’s face it, that’s normal, right? Who’s going to start new projects in December when people are thinking vacation? So we’ve got this pent up demand and it’s going to start getting triggered.

Now as we go into January, brings me to the payrolls problem is with all this pent up demand finally getting released when and how much it got released is the question. So this Friday we’ve got payrolls coming out.

Consensus is pretty weak as of today.

I think consensus is looking for about 150,000-160,000 payroll numbers. That’s a fairly weak number. I’m a lot higher than that. I’m at, I think 234,000 which is a strong number.

I’m not going to drag you into the weeds of how I get to that number, but basically we’re at a place where there’s minimal firing and some hiring.

Again, post-election, there’s a little bit of exuberance, but that minimal firing is what you’re seeing. Also in jobless claims. Let me go and sort of contextualize jobless claims here. Historically, we’re talking like before covid, you got a number of 220,000 claims.

That number was signifying a good strong economy. You have a hundred and something million people working and you have 0.1% of them raising their hand each week saying, I need work. I was just fired. Okay? The thing is that 220,000 numbers locked in a lot of economists, a lot of experts will say 220,000, that’s the baseline.

Well, what they’re forgetting is that over time working civilian population has grown. It’s surged.

So if you were to say update that number relative to today’s working population, you probably would say 250,000 is the magic number. I’d put that out there. 220,000, maybe 5, 6, 7 years ago, 250,000 today last week, 211,000 initial jobless claims.

So no matter what your baseline is, that historical two 20, or as I’m asserting something closer to 250,000 211,000 is signifying a strong labor market. It’s saying employers do not want to let go of their employees.

And again, that fits in with what I’m saying, which is they’ve been on the sidelines, companies have been waiting to take action, and now they’re about to take action.

The problem though, with all this economic activity is market doesn’t want it. The market wants rate cuts. It’s not going to get them as much as they want, so they’re having to digest this as the market melts down, they might melt down on Friday when payrolls come out and they’re stronger than expectations.

As this happens, buy the dip is my opinion. A quick quirk on Friday with payroll. Something to look for is the unemployment rate, because that’s coming sharper into focus. That’s moving up a little bit. I think it’s going to move up again on Friday, but again, for context came in at 4.2% unemployment rate last month. I think it’s going to hit 4.3%, but don’t panic. 5-6% is what we’ve seen historically.

Our unemployment rate, our labor market is so strong that our payrolls are up. Our jobless claims are down, and unemployment continues to be very mild.

Fed has no pressure to cut rates under these conditions, and so factor that into your investments. For example, your bond yields, if the Fed doesn’t cut rates, your bond yields aren’t going to go down. That means bond prices are going to stay approximately where they are. Let’s see what happens Friday.

Remember, we’re in it to win it.