Turned Tight 

Doug Nolan


U.S. Non-Farm Payrolls increased 559,000 in May, about double April’s 278,000 gain, but still below the 675,000 consensus forecast. 

Average Hourly Earnings rose a stronger-than-expected 0.5% for the month, with back-to-back strong monthly earnings gains (April up 0.7%). 

The Unemployment Rate declined to 5.8% from April’s 6.1%, the lowest level since April 2020. 

It’s worth noting monthly Unemployment averaged 5.9% over the past 30 years (6.2% over 40 yrs and 6.3% over 50 yrs).

June 4 – Bloomberg (Christopher Condon): 

“Federal Reserve policy makers should be ‘deliberately patient’ and wait to see more evidence that the U.S. labor market has made more progress before they consider cutting down their asset-purchase program, Cleveland Fed President Loretta Mester said. 

‘We want to be very deliberately patient here because, you know, this was a huge, huge shock to the economy,’ Mester said… Mester spoke just after a Labor Department report showed U.S. job growth picked up in May… ‘I view it as a solid employment report,’ she said. 

‘But I’d like to see further progress.’ 

Mester noted that the prime-age labor-force participation rate has yet to return to pre-pandemic levels. 

She said she was not overly concerned about inflation because she didn’t see wage increases feeding into higher overall prices.”

The FOMC is clearly in no rush to begin the process of pulling back on massive monetary stimulus. 

I guess May’s somewhat weaker-than-expected jobs gain provides justification for pushing out the talk about talking about tapering – at least that’s the way the bond market traded Friday. 

Ten-year Treasury yields dropped seven bps in post-jobs data trading, with yields ending down four bps for the week. 

The U.S. dollar index dropped 0.4% Friday, reversing most of the gain from earlier in the week - and throwing some cold water on the sickly greenback’s recovery attempt.

Lost in the shuffle was ADP’s stronger-than-expected 978,200 jobs added in May (estimates 650k), the strongest showing since June 2020. 

ADP reported a booming 850,000 Service-Provider jobs added. 

Curiously, ADP reported 65,000 new construction jobs, in contrast to Friday’s Department of Labor data posting a 20,000 decline. 

ADP had 128,000 Goods Producing jobs added, versus the Labor Department’s 3,000. 

Moreover, ADP reported pervasive strong employment gains at small, medium and large companies. 

Examining weekly jobless claims data, applications for unemployment benefits dropped to 385,000, the lowest level since March 2020. 

Weekly Initial Jobless Claims averaged 940,000 over the past year.

June 2 – Business Insider (Grace Dean): 

“The US labor shortage, which is hitting industries from education and healthcare to hospitality and ride-hailing apps, is holding back the nation's economic recovery from the pandemic, the US Chamber of Commerce said… 

In some states and some industries, there are fewer available workers than there are vacancies, a new report by the Chamber said. 

‘The worker shortage is real - and it’s getting worse by the day,’ Suzanne Clark, the president and CEO of the Chamber, said… 

‘The worker shortage is a national economic emergency, and it poses an imminent threat to our fragile recovery and America's great resurgence,’ she said.”

June 1 – The Hill (Joseph Choi): 

“The worker shortage crisis in the U.S. has continued to worsen in the past months according to… the U.S. Chamber of Commerce. 

The Chamber stated in its reports that in March there were a record 8.1 million vacant jobs in the U.S., showing an increase of 600,000 positions from February. 

However, the number of available workers per job, 1.4 workers per job, has become half of what the national average has been for the past 20 years… 

The business group notes that in some industries, there are fewer available workers than the number of vacant jobs, such as education, health services and government jobs. 

‘More than 90% of state and local chambers of commerce say worker shortages are holding back their economies, and more than 90% of industry association economists say employers in their sectors are struggling to find qualified workers for open jobs,’ the Chamber wrote…”

Chamber of Commerce data and comments corroborate myriad anecdotes of an increasingly unbalanced and overheated economy suffering from bottlenecks, supply chain issues and shortages (including labor).

June 1 – Reuters (Lucia Mutikani): 

“U.S. manufacturing activity picked up in May as pent-up demand amid a reopening economy boosted orders, but unfinished work piled up because of shortages of raw materials and labor. 

The Institute for Supply Management (ISM) survey on Tuesday found companies and their suppliers ‘continue to struggle to meet increasing levels of demand,’ noting that ‘record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments’ of manufacturing. 

According to the ISM, worker absenteeism and short-term shutdowns because of shortages of parts and workers continued to limit manufacturing's growth potential.”

According to the ISM survey, Average Delivery Times jumped to a record 85 days. 

At 78.8, the Supplier Delivery Index rose to the highest level since 1974. 

The Backlog Index advanced to a record high 70.6, while Factory Orders rose to 67 (“just below a more than 17-year high”). 

Separately, the IHS Market Manufacturing PMI index rose to 62.1%, with New Orders up almost four points to 65.6, both at record highs in survey data back to 2007.

Meanwhile, the ISM Services Index gained to 64 (up from 62.7) in May, the highest reading in survey data that goes back to 1997. 

Services Prices Paid surged almost four points to 80.6, second only to the September 2005 price spike. 

Growth was notably broad-based, with all 18 industry components registering growth in May. 

Meanwhile, both the IHS Markit Services PMI Index and Prices component rose to survey record highs. 

The ISM Manufacturing and Services Surveys each posted declines in Employment components. 

The Services Employment Index declined more than three points to 55.3. 

Bloomberg quoted Anthony Nieves, chair of the ISM’s Services Business Survey Committee: 

“Even if all the businesses right now tried to reopen everything tomorrow, they couldn’t do it because they have capacity issues. 

They don’t have the labor. 

They don’t have the production capabilities.” 

June 3 – Reuters (Evan Sully): 

“Nearly half of U.S. small business owners reported unfilled job openings in May, marking the fourth consecutive month of record-high readings as finding qualified applicants remains a lingering challenge… 

The National Federation of Independent Business (NFIB) said in its monthly jobs report that 48% of small business owners reported unfilled job openings in May on a seasonally adjusted basis, up from 44% in April. 

May's reading is 26 points higher than the 48-year average of 22%. 

Furthermore, the report showed that 93% of owners looking to hire reported few or no ‘qualified’ applications for the positions they were trying to fill last month.”

If the ISMs, PMIs, NFIB and the Chamber of Commerce aren’t convincing, Fed officials need to look no further than their most recent “Beige Book” (released Wednesday) for evidence of tight labor markets. 

“Labor demand strengthened, but hiring was held back by widespread labor shortages.” 

“Manufacturers reported that widespread shortages of materials and labor along with delivery delays made it difficult to get products to customers. 

Similar challenges persisted in construction. 

Homebuilders often noted that strong demand, buoyed by low mortgage interest rates, outpaced their capacity to build, leading some to limit sales.”

“Staffing levels increased at a relatively steady pace, with two-thirds of Districts reporting modest employment growth over the reporting period… 

It remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople. 

The lack of job candidates prevented some firms from increasing output…”

And by region: 

Boston “Labor demand strengthened, but hiring was held back by labor shortages.” 

New York: “Hiring picked up and wages continued to grow moderately, with availability of workers cited as a top concern.” 

Cleveland: “Hiring activity was reportedly modest because of a dearth of job applicants. 

A greater share of firms boosted wages, especially for hourly workers.” 

Dallas: “Reports of labor shortages were more widespread across sectors and skill levels than the last report.” 

Atlanta: “Labor markets improved and wage pressures picked up for some positions.” 

San Francisco: “Economic activity in the District expanded significantly, and labor market conditions continued to improve modestly. 

Wages and inflation picked up further.” 

Chicago: “Employment, consumer spending, business spending, and manufacturing production all increased moderately…”

Prior to Friday’s jobs data, there appeared to be some momentum building for beginning to talk about talking about tapering. 

Philadelphia Fed President Patrick Harker on Wednesday commented, “We’re planning to keep the federal-funds rate low for long, but it may be time to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases.” 

He added it’s “not something we are going to do suddenly, though.” 

“I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time.”

Dallas Fed President Robert Kaplan this week reiterated his view that he’d prefer to “talk taper sooner rather than later.” 

“I think it would be wiser sooner rather than later to begin discussions about adjusting our purchases with a view to taking the foot off the accelerator gently, gradually, so we can avoid having to depress the brake down the road… 

At this stage, as it’s clear we are weathering the pandemic and making progress, I don’t think the housing market needs the level of support that the Fed is currently providing, and I would love to see sooner rather than later a discussion of the efficacy, for example, of those mortgage purchases.” 

Kaplan also shared his view that labor markets are tighter than some of the data may suggest.

It’s not as if Harker and Kaplan are espousing hawkish views. 

“Slowly, carefully…” and “gently, gradually” certainly do not imply a forceful tightening of monetary policy. Indeed, the plan is to withdraw stimulus cautiously, to ensure markets don’t tighten financial conditions. 

But with major imbalances and mounting inflationary pressures, it seems rather obvious the Fed should be preparing markets for a pullback from the most extreme crisis-era monetary stimulus imaginable. 

The old, “what are they afraid of?” comes to mind. 

Fed officials can continue to use millions of unemployed workers as justification and rationalization for crazy inflationist policies. 

Yet the Fed’s prevailing worries center around asset Bubbles and the likelihood of a destabilizing “taper tantrum” when it eventually moves to rein in stimulus measures. 

Market expectations have the Fed beginning the taper discussion over the coming months, but not actually commencing balance sheet reduction until early next year. 

This would likely push the initial little baby-step rate increase out to 2023. 

It is frightening to contemplate the depth of structural damage that could be inflicted from prolonging “Terminal Phase” excess for a couple additional years.

AMC Entertainment gained 95% in a wild Wednesday trading session (up 83% for the week), pushing year-to-date gains to 2,160%. 

The Goldman Sachs Most Short Index surged 7.6% Wednesday, capping an eight-session run of 17.8%. 

Koss was up 77% on Tuesday and Wednesday, before an abrupt selloff cut the week’s gain to about 17%. 

Blackberry as much as doubled in two sessions, ending the week up 38%. 

GameStop rose a third before closing Friday with a 12% weekly advance. 

PetMed Express jumped 58% during Wednesday’s session and ended the week up 13%. 

Bed Bath and Beyond rose 62% Wednesday, but the week’s gains were cut to about 13% by Friday. 

Express gained 36% Wednesday (up 15% for the week); Naked Brands 29% (up 13%); Workhorse 20% (up 36%); and GTT Communications 57% (up 110%) - as so-called “meme stocks” sprang back to life with a vengeance. 

It’s worth noting the “average stock” Value Line Arithmetic Index traded Friday to an all-time high, with a year-to-date gain of 22.7%. 

The Philadelphia Oil Services Index ended the week with 2021 gains of 57.4%; the KBW Bank Index 36.9%; the Nasdaq Bank Index 35.7%; the Dow Transports 23.7%; the S&P600 Small Cap Index 23.4%; the NYSE Financial Index 23.4%; the Bloomberg REIT Index 19.8%; and the S&P400 Midcaps 18.3%. 

The Goldman Sachs Most Short Index has gained 41%. Not bad for a little more than five months.

June 3 – Bloomberg (Katherine Doherty): 

“AMC Entertainment Holdings Inc.’s debt is also getting a blockbuster boost from retail stock trading mania. 

AMC’s 12% second-lien bonds rose above their face value of 100 cents on the dollar Thursday, a stunning comeback from their low of just 5 cents on the dollar last November. 

The company’s debt rallied this week as credit investors cheered the latest rounds of equity financing… 

Proceeds from the 11.6 million of new shares AMC sold Thursday -- worth $587 million -- are earmarked for general corporate purposes, a catch-all term that can include activities like paying down debt or funding acquisitions.”

It’s clearly not only equities securities benefiting from the loosest financial conditions imaginable. 

Junk bond Credit default swap (CDS) prices dropped four bps this week to a 2021 low 283 bps – and are now only about eight bps above January 2020’s decade low 275 bps. 

At $270 billion, U.S. junk bond issuance in five months has already surpassed 2020’s record first-half issuance. 

Investment-grade CDS declined marginally this week to near-2020 lows.

June 3 – Bloomberg (Caleb Mutua, Paula Seligson and Craig Torres): 

“The Federal Reserve’s plan to begin unwinding its unprecedented backstop of corporate debt is rekindling an idea that many have warned about: that investors are now convinced that the central bank will bail them out again if needed. 

From Neuberger Berman to Invesco Ltd., investors say that the Fed’s intervention at the depths of the Covid-19 pandemic provides a model to follow for future crises, which isn’t necessarily what the central bank wanted to communicate. 

Chairman Jerome Powell has said the Fed would only act as a backstop in once-in-a-generation type emergencies. 

Yet risk premiums barely moved after the central bank said it’s going to gradually shed those investments, and companies are still selling bonds after a relentless rally over the past 14 months that’s driven borrowing costs to all-time lows and debt issuance to record highs.”

While the Fed stated its intention to unwind its corporate bond portfolio was unrelated to monetary policy, I have to wonder if they had hoped this move might throw a bit of cold water on speculative excess. 

A couple of cogent Bloomberg headlines: Thursday: “As Fed Exits Credit, Investors See ‘Helicopter Parent’ Close By.” 

And Friday afternoon: “Fed to Keep ‘Invisible Presence’ in Bond Market, Citigroup Says.” 

The Fed in March 2020 opened Pandora’s box - and no one believes the Fed’s corporate bond market backstop will be relegated to “once-in-a-generation emergencies”. 

I am reminded of when the GSEs aggressively intervened in the MBS marketplace for the first time in 1994 (expanding balance sheets by a then unprecedented $150bn). 

This backstop momentously altered market risk perceptions and debt securities prices, incentivizing leveraged speculation and Bubble excess. 

The GSE backstop returned in crisis year 1998 to the tune of $305 billion – and then these quasi-central banks expanded balance sheets another $317 billion in 1999, $242 billion in 2000, $345 billion in 2001, $242 billion in 2002, and $246 billion in 2003. 

Huge – history altering – numbers, but rather small potatoes compared to what will play out with the inflation of the Fed’s balance sheet. 

June 4 – Bloomberg (Alex Wittenberg): 

“The Federal Reserve will keep its ‘invisible presence’ in the corporate-bond market even after unwinding a program that sent borrowing costs for companies plummeting while spurring a rally in credit, according to Citigroup… 

The Fed couldn’t credibly exit the debt market because ‘it cannot tolerate the catastrophic consequences of bond origination and secondary trading snapping shut,’ Citigroup strategists led by Daniel Sorid wrote… 

As long as corporate bonds remain important to the financial system, the Fed’s program will ‘continue to exert power over the market,’ according to Citigroup.”

Snake down the path of activist/interventionist central banking and inflationism, and there will be no turning back. 

That’s especially the case in this age of unfettered “money” and Credit, speculative excess and myriad asset Bubbles. 

It’s kind of crazy the Fed is using the unemployed to justify $120 billion market liquidity injections. 

To our central bankers’ great surprise, much of our nation’s labor market has Turned Tight. 

And it’s not at this point easy to pinpoint the benefits of prolonging egregious monetary inflation. 

Meanwhile, myriad risks – certainly including unleashing an inflationary spiral and stoking perilous asset Bubbles – are increasingly obvious.

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