BLS Overstates, FOMC Minutes Revealed, Microsoft Juggles
We tried to warn you that job creation was being overstated.
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Markets did not really roar on Wednesday. What they did do — equity markets, anyway — was rise methodically in response to two news events. Twitter, or the social media platform "X," was alive with accounts marveling at how there was no real reaction to the day's highly-touted news events. The daily charts, however, do show increased intraday volatility and increased intraday trading volume around both events.
Not What We Were Told
First came the Bureau of Labor Statistics and their annual preliminary estimate for the upcoming benchmark revision to the current employment statistics (CES), which produces the monthly non-farm payrolls estimate in the establishment survey. The estimate for the 12-month period covering April 2023 to March 2024 essentially wiped out 818,000 jobs of the 2.9 million reported as created during that time frame.
In short, 28.2% of all jobs reported as having been created during that 12-month period never even existed. This benchmark revision is made official every year in February, so we won't see this in the backdated data for several months, but this is — or should be — hugely embarrassing for the Bureau of Labor Statistics and its parent, the Department of Labor.
Combined with last year's revision of -359,000 jobs, the BLS has overstated job creation in the monthly data over a two-year period by a stunning 1.117 million positions. What this also does is change a year where we were told by the financial media repeatedly that the U.S. labor market was robust, creating 242,000 jobs per month to a year where in fact, the labor market was creating a slightly "below average" 173,500 jobs per month. After revisions, the U.S. labor market created a tad more than 180,000 jobs per month for the calendar year of 2019, which was the last pre-pandemic and maybe the last "normal" year. So, demand for labor since early 2023 has been slightly weaker than the pre-pandemic norm.
It's Not Like...
...We did not warn investors and the financial media nearly every single month that the math wasn't working. It's not like we didn't point out the gap between the household survey and ADP numbers for job creation on one side that appeared to oppose the NFP print on the other side almost every single month since early 2023. It's not like we did not point out on a quarterly basis, the BLS BED report that showed job creation drastically overstated. It's not like we had not pinpointed the likely culprit for the monthly overstatement as being an incorrect birth/death model.
We wrote on these matters every month. We mentioned these issues on national television many times. Instead, the financial media was intent on cheerleading an optimistic narrative and largely ignored writers like myself and several others, ignored the BLS' other surveys and ignored the monthly ADP employment report. Now, because this story was not important enough or "helpful" enough, the labor market faces its largest downward revision since 2009.
Where Are the Revisions the Largest?
For the 12 months ending with March 2023, professional and business services (high-paying jobs) took the largest hit with a downward revision of 358,000 jobs. Leisure and hospitality, retail, manufacturing and "trade, transportation and utilities" all took downward revisions of more than 100,000 positions. Upward revisions were made to private education and health services and transportation and warehousing.
What This Did...
...Was to reinforce the notion that both labor markets specifically and the U.S. economy more broadly are not as strong and never were as strong as reported. I have also told you that 2023 GDP will likely have to be restated at some point. There were more holes in that number than one could shake a stick at.
Yes, I know policy decisions were made and markets traded off of this incorrect data that many of us caught in real-time. That's, to a great degree, on the financial media (with certain exceptions) as the narrative was more of a priority than the truth. Credit to TheStreet Pro for not only supporting my monthly job rants but giving them a home and even featuring them.
This estimated revision reinforced the idea up and down Wall Street that the Fed would almost certainly have to cut short-term interest rates in September and that the only question left was by how much. A strong August labor market report in early September would likely no longer impact this outcome as we now know, without a shadow of a doubt, that the monthly NFP prints were and probably still are deeply flawed.
Easy to blame the BLS, and they should have caught this simply because they have more tools than we do and we caught it. That said, their other surveys and estimates were more accurate, and these are government employees. Not a knock, but 75-to-100-hour work weeks are not as big in those circles as they are in the private sector where out-performance is rewarded financially.
Revealing Minutes
Something happened on Wednesday when the FOMC released the minutes of their July policy meeting. Now, remember... the minutes are released with a three-week lag, so rare is the release where we actually learn something important. That was not the case this time around.
We learned that not only did a majority of committee members believe that it was likely appropriate to reduce rates at the September meeting should incoming data not upset that plan, but that there were members that at least considered cutting rates on July 31, 2024.
The following quote taken from these minutes, really tells all:
"All participants supported maintaining the target range for the federal funds rate at 5-1/4 to 5-1/2 percent, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this (July 31) meeting or that they could have supported such a decision."
Probabilities
Now, with backwards-looking labor market information supportive of the more dovish members of the FOMC, and no trust whatsoever in whatever shows up as a non-farm payrolls estimate for August, it's game on for September 18, 2024.
Currently, fed funds futures markets trading in Chicago are pricing in a 69% likelihood for a 25 basis point rate cut on September 18, 2024, and a 31% chance for a cut of 50 basis points. They may tread lightly as it is election season. By the end of the November 7, 2024 meeting (Election Day is November 5, 2024), there is now a 60% probability for an aggregate cut of at least 75 basis points. By year's end, according to these markets, there is a 73% likelihood for an aggregate cut of at least 100 basis points and within that number, a 28% chance for a cut of 125 basis points in total or more.
Marketplace
One day after our one-day and rather moderate sell-off on Tuesday, equities took the ball with these two news events and made like Herschel Walker (The New Jersey General version, not the Minnesota Viking version). Nearly every single mid-major to major U.S. equity index I follow traded higher on Wednesday. The KBW Bank Index did trade slightly lower, The S&P 500 gained 0.42%, as the Nasdaq Composite gained 0.53%. The Philly Semiconductors (+1.38%) and the small- to mid-caps outperformed broader markets.
Ten of the 11 S&P sector SPDR ETFs ended the day in the green, led by the Discretionaries XLY and the Materials XLB as both of those funds gained more than 1% for the session. Only the Financials XLF, as witnessed above by the KBW Banks, closed in the red.
Winners beat losers by more than three to one at the NYSE and by less than three to one at the Nasdaq. Advancing volume was strong, taking a 72.6% share of composite NYSE-listed trade and a 74.5% share of composite Nasdaq-listed activity. Aggregate trade was spotty, but up in places. Activity increased on a day-over-day basis across the listings of the NYSE as well as across the membership of the S&P 500. However, activity contracted significantly (-10.2%) day over day for Nasdaq-listings.
Microsoft Juggles the Lineup
Microsoft MSFT is tinkering with the firm's organization and how financial performance will be reported going forward. Microsoft 365 commercial products and cloud services. which is a part of productivity and business processes, will now include enterprise mobility and security. That unit had previously been included in Azure as part of the intelligent cloud segment.
Additionally, Windows commercial products and cloud services will now also become part of the productivity and business processes segment, leaving the more personal computing segment. This impacted the guidance that the firm had provided in late July. Expected current quarter revenue for the more personal computing segment has been taken down to $12.25 billion to $12.65 billion from $14.9 billion to $15.3 billion. However, expected revenue for the productivity and business processes segment were taken up to $27.75 billion to $28.05 billion from $20.3 billion to $20.6 billion.
Expected growth for the Azure platform and other cloud services under the new alignment is seen at 33% in constant currency, up from a projection for growth of 28% to 29% in constant currency under the old alignment. Microsoft remains the most heavily-weighted long position on my book.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 228,000, Last 227,000.
08:30 - Continuing Claims (Weekly): Last 1.864M.
09:45 - S&P Global Manufacturing PMI (Aug-Flash): Expecting 49.5, Last 49.6.
09:45 - S&P Global Services PMI (Aug-Flash): Expecting 54.1, Last 55.0.
10:00 - Existing Home Sales (July): Expecting 3.9M, Last 2.89M SAAR.
10:30 - Natural Gas Inventories (Weekly): Last -6B cf.
11:00 - Kansas City Fed Manufacturing Index (Aug): Expecting -10, Last -12.
The Fed (All Times Eastern)
All Day - Jackson Hole Economic Symposium.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: AAP (.97), BJ (1.00)
After the Close: INTU (1.85), ROST (1.49), WDAY (1.65)
At the time of publication, Guilfoyle was long MSFT equity.
