OH SH T The Labor Market JUST Broke

The labor market just broke. We're seeing the first signs of stagflation take hold, as average hourly earnings just plummeted. On top of that, the services sector, which has been holding together the entire U.S. economy, just turned down for the first time in three years. But we're gonna cover all that plus, talking about how the markets are likely to interpret this, everything you need to know to set you up for Monday's trading. Because nonfarm payrolls rose 170,000 last month, that's the most since the end of 2024, after a vision showed a sharper decline in February. Now, I thought the number was gonna be positive, but this blew away all expectations, including mine. And I think the market is going to have an extremely positive reaction to that tomorrow. But first, let's look. Because the change in total nonfarm payroll employment for January was revised up by 34,000, from 126,000 to 160,000. And a change in February, revised down by 41,000, from minus 92 to minus 132,000, meaning payrolls were combined 7,000 lower than expected. So on the headline, the number looks fantastic. But just over the last two months, and I want you to keep in mind that for the economy, just to deal with expansion, just to deal with people being retired, what you need is somewhere between 100 to 150,000 jobs created per month. Over the last two months, on average, we're talking 25,000 jobs. Now, this is something we typically only see as we head into the early stages of a recession. And the Household Survey will completely validate that. Because the Household Survey showed that while the establishment posted a solid increase of 170,000, which we can assume is going to be revised and changed later, the household increase declined again, dropping by 64,000 the third month in a row. So what happens here is households get surveyed directly and they're telling us, and they've continued to tell us that the labor market is getting worse. And again, these are all symptoms, all signs that you see in early stages of stagflation, the point that the economy continues to trend down, headed right into a recession. If the conflict had not happened in the Middle East, I think the stabilization narrative would be gaining momentum, thus from a senior economist at Wells Fargo. The problem, though, is we now have this new shock working its way through the economy. So what I want you to see here is the market is overly bullish on this narrative. They actually believe that the U.S. economy is stabilizing here and looking to move higher and that it would actually be better if it wasn't for the energy shock. Now, the big question we have is, at what point does the energy shock go too far, too long, and push the economy into recession? Because remember, four out of the last five energy shock led straight to a recession. But the market's interpretation of this strong, bullish payroll report, I think it's likely going to send stocks higher to Monday. We'll find out as the futures open here and we take a look at the unemployment rate now, which fell to 4.3%, but for all the wrong reasons. And so partially reflected, Americans now leaving the workforce. Again, bad news here. So what you're starting to see is, even though we get this big payroll report, the overall trend continues to head lower. And that's the problem, because now people are giving up hope. The participation rate, that's the share of population is working or looking for work, slipped to 61.9% in March. That's the lowest since 2021. Meaning people are just giving up looking for a job because there's no hope. They go looking and they find nothing. And here is a strong indication that things are getting worse. The number of people working part-time for economic reasons rose. Again, that is a sign of stagflation. So even though the headline number was huge and the market reaction likely very positive of that, the overall trend is down. So what this starts to create is a short-term move higher in the market, but keep in mind, it's unlikely to be sustained. Now let's dig deeper into this report. Because when we take a look at the labor force participation rate, it's telling us that the labor market's going to get weaker. Now I've overlaid that in red against job openings. That's the JOLT survey in blue. And what I want you to see is as the participation rate goes down, what happens? Job openings also decline. Now that makes perfect sense because as people give up hope on the labor market, well, it's because there are fewer jobs. Now on the upside direction, we don't see that strong correlation, but look at this. Going into every recession, what do you see? The participation rate is declining and job openings drop. And so here's the problem. The participation rate just dropped in a big way, suggesting that total job openings going forward are going to continue to decline. Now for workers, the report showed an average hourly earnings rose 0.2% for February and 3.5% from a year earlier. That is the least in almost five years. So what we're seeing now is average hourly earnings are plunging in a big way. Let's take a look at this chart. Because again, as we talk about stagflation, we talk about consumers' ability to absorb higher energy costs. The answer is they don't have it. And that's a problem. Let's go all the way back to 91. What happened? We see for production and non-supervisor employees, average hourly earnings decline went right into the 91 recession. The same thing repeated going to the dot-com bubble. In 2004, we saw a huge decline, but offsetting that was a big increase in hours worked. For 2008, notice that steep decline, right in the middle of a recession. In fact, in 2014 through 2016, remember the stock market did not perform too well. Why? Because average hourly earnings were down. We see the market correction in 2022, validated by the same movement in the labor market. And now look, a big drop in hourly earnings, again, indicating, and this is the big question we should always have, is why do energy shocks push us into a recession? It's because consumers cannot absorb them. That means they have to cut their spending on other sides of the economy. And when you get validation of that, you start to see that why you start to get close to around 60 days in an energy shock, there is no point of return, it's too late. Right now, we're pulling into week six, the economy's already weak, the labor market completely showing signs it's getting weaker. Question is why are average hourly earnings dropping? Let's take a look at this next chart. Because when we overlay crude oil prices in red, that is West Texas Intermediate, I want you to see that you get these energy shocks and then a decline in average hourly earnings. You see that in 91, you see that in 2000, 2001. You see it happen around 2004. Again, the financial crisis. How about around 2015, 2016? You get rising oil, weaker hours. Same thing in 2022. And now we're starting to see it again. So what you're seeing here is a reaction from employers saying, look, we're trying to absorb these higher costs, but we can't because we know demand isn't there. So the only solution we have in the short run, rather than laying a ton of people off, is that hope that the shock is temporary. And what we can do to respond to that is pay our employees less. And because they already know the labor market is weak, they already know that the participation rate is falling, there aren't jobs out there, they're unlikely to leave. Now, there is some good news in this pay report. Average hourly, weekly hours, that is, did hold up. Let's take a look. Because production and non-supervisory employees, you can see weekly hours unchanged last week. Broadly speaking, though, for including management, they continue to decline slightly. And this is running around the same level we saw between 2012 and 2018. So this is good news. So workers are still getting an hour, they're just not getting the pay raises they need. But this is, again, we're seeing one step closer. The moment we start to see hours cut, and wait till we get to what's going on with services sector, you'll see very clearly that we're very close to that event happening. It means we've reached the point of no return. And the market? I'll respond in exactly how you might think. Now, keep in mind, on Friday, the bond market was open, but the stock market was not, and what did we find out? Treasuries fell, that bond prices go down, interest rates go up, after better-than-expected March employment data sending yields higher by three to four basis points across maturities. Traders erased what little remained of their wagers on Fed easing this year, and trimmed expectations of a cut in 2027. So now, the market's saying, look, due to rising inflation, the Fed isn't going to cut. But what if I told you the Fed is likely to cut because the market has got this wrong? Let's take a look at this next chart. We've got average hourly earnings in blue. That is, again, a production non-supervisor employees. We're gonna overlay the federal funds rate in red, and you can see it's average hourly earnings declined in 91. What happened? The Fed was cutting rates. They did it again right around 2000, 2002, then 98. They did it again, going into the financial crisis. How about before the pandemic? We didn't really see hours work drop much. The Fed was actually more concerned about other issues. But now, look, you can see as hourly earnings continue to drop, what's gonna happen? The federal funds rate likely to go down because what the Fed's gonna interpret this as is exactly what I'm telling you, is that consumers can't afford higher prices, which is exactly what showed up in the services sector. Let's take a look at that, and we'll talk about how I think the market is gonna respond, how you need to trade this. Because the S&P Global US Services PMI said the business activity declined amid higher inflation and war in the Middle East. So what is that telling you? Is that consumers are starting to cut back on their discretionary spending. So this is the warning sign. Now, I know this is difficult because right now, everything is saying the economy should be slowing down, but the stock market doesn't look like it's going down anymore. Why? Because these macro forces, they take time. That's the issue here. The market is not convinced we're headed lower yet. Now, the headline S&P Global US Services PMI recorded 49.8 in March. That is a very slight contraction down from February's 51.7, and lower than the flash estimate. Now, overall, it was the Lindex's lowest reading for over three years and consistent of the fractional contraction in activity. So what we're seeing here is consumers are already pulling back. Now, in the surveys recently, this is really interesting. Consumers said, hey, we're not gonna go out and buy a new home. Now, keep in mind, when consumers buy a new home, what is the reason they're doing it for? Because they're confident about their job, they're confident about the economy, they're confident about their ability to get pay raises. So they're saying, look, we're not gonna do that. And they're also saying, we're cutting out our vacations. Now, it's a big sign, because you think about the services sector as we head into the summer. They ramp up hiring. Why? Because people travel, airplanes, hotels, restaurants, you name it, everything. Consumers are pulling back and saying, look, we're probably gonna buy some durable goods here. Think maybe replacing their washer and dryer or their fridge, things of that nature. But big ticket items that involve energy, they're backing off. Now, reduced new orders and a less positive outlook pushed firms to reduce staffing levels at the end of the first quarter. Firms also indicated weakening pressure on capacity as backlogs of work increased at the least pronounced rate since last October. So it starts to make sense of why we're seeing these slight layoffs in the services sector. They're not getting the new orders they need, and their backlogs aren't growing that much. So what we're seeing in the services sector is they're saying, we think demand, future demand is going to get weaker. We have enough workers to get through our backlogs, and that's why we're starting to see early signs of them laying off. And where possible, firms sought to pass on higher cost declines via a rise in their own selling prices, which we know, of course, consumers cannot afford. Inflation, again, above its long-term trend, having accelerated to an eight-month high in March. And again, what does this validate? It's exactly what we're seeing in the data, is that we're headed right into stagflation, rising prices, weakening employment, falling average hourly earnings. It's the next step, if when we see weekly hours decline, it's a game-over scenario at that point. But we can already see the impact this is going to have on the retail space. Let's take a look at total income. This is what we're gonna do, is merge hourly earnings and multiply that by weekly hours, bringing the total income for production of non-supervisory employees, that in blue, against advanced retail sales in red. And what I want you to see, as total incomes in blue goes down, what happened? Retail sales go down. You wanna know why there's issues in private credit? Well, you're gonna see it in a moment. You see that relationship going into the financial crisis. How about the double-dip recession we almost had in 2012? Look at what happened in 2022, the market correction, and now look. Incomes are stagnating at the time that inflation is going higher. That means retail sales likely to go down here. And again, you talk about the reason private credit's gonna blow, it's because all this inventory isn't going to move. But does this mean the stock market can't rally in the short term? Well, I think it can. Because there's a concern in this energy disruption unleashed by the war in the Middle East that may have a lasting impact on the actual resilience of businesses and households over the coming months. And that is indeed the risk. You get to the 60-day market, if energy prices don't come down, it's game over. But in a weakening economy, we may be past the point of no return. But for the market, well, a bullish pay report is generally good for stocks. Let's take a look at over the last three days. So we have Tuesday, Wednesday, and Thursday, remember, market closed on Friday. Big, beautiful green candlesticks, again, showing that the market wants to buy here despite the big drop Thursday. Stocks did rally back. Now, if we get a move down, which we could in the overnight trading, we'll find out what happens by Monday morning. But if we see another green candlestick, to me, this is a very bullish indicator. Now, let's take a look, because I wanna switch to the VIX, but keep in mind, if this thing gets over the 200-day moving average, that's the orange line, also bullish, and then here's the CTA threshold levels, the midterm and the short-term are right next to each other. I've never seen that before. So if we get a close above that, you get a massive amount of supply coming back into the market. There's a reason why I continue to buy on this dip, because I think it could pan out. Now, take a look at the VIX here, because this is the other thing you should be looking at. The fact is, every time the VIX gets into the 30s, you see between roughly 27 and 30. If it doesn't break out and reverses, that is a buying opportunity. More often than not, it plays out right now. Again, we don't know what's gonna happen until we see the open, but for right now, you see vol sellers coming in and pushing volatility down below 25. Again, this is a bullish indicator that we could see volatility drop, stocks drop, and of course, there's also the dollar, which is now, again, peaking back up into that sell zone. The sellers of the dollar reign supremium. So if you get vol down, stocks up, and the dollar down, this is a short-term bullish indicator, but the reason I want you to see the data, the reason I want you to understand the trend is going lower, because even if we do get a big rally here, potentially back up to the all-time highs, it is unlikely to stick, because you have to get past what you've seen in the macro data, and sometimes in the short term, you can get these kind of bear market rallies or things that don't make a lot of sense compared to the data, but I want you to see why. This is why I'm buying the dip, maybe why you want to. We'll see what's going on Monday, and we'll connect back and look at things again. With that, I'm Steve Van Meter. I hope you had a great Easter. I'll see you soon. Bye now.