Edition #205
King Dollar
Investors,
I’m unfortunately still recovering from being sick this week, so I’m going to keep this latest report short and sweet by purely focusing on new economic data. I’ll be providing new stock market and crypto analysis in tomorrow’s premium research report.
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Macroeconomics:
The labor market continues to be shining star of the U.S. economy. While the argument can be made that the labor market is decelerating, it’s unequivocally strong & resilient. With another series of data at our disposal, here are the main aspects from each report that stood out to me:
Job Openings & Labor Turnover Survey (JOLTS) for July 2022:
Total job openings at the end of July were 11.239 million, significantly higher than estimates of 10.4M and prior month results of 11.0M (revised higher from the original 10.7M).
There were 6.4 million hires for the month of July, compared to 1.6M layoffs and 4.2M quits. Notably, the quits rate briefly declined from 2.8% to 2.7%, which is still elevated from a historical perspective. Similarly, the layoffs rate remains historically low at 0.9% for another consecutive month.
This dynamic between quits & layoffs continues to highlight the key theme that I’ve been sharing for months: People within the labor force (employees) have ample opportunities and have been seeking them out at a record pace. Meanwhile, employers have struggled to find qualified labor and are therefore unwilling to release their existing employees.
Quite simply we are in a worker’s labor market, where the negotiating power is in favor of the employees. If their current employer won’t offer them the desired salary, upward trajectory, or work-life balance, they’ll find a better opportunity amongst the 11.24M openings. Employers, still struggling to fill a record number of job openings, are forced into a position where they must out-bid their competitors and extend strong offers to potential recruits.
This flexibility for skilled labor to find its highest value in an open market is the very definition of resilience & strength, in my opinion. It quite literally represents an excess of opportunity.
Nonfarm Payroll (NFP) August 2022:
The latest NFP data divided economists as to whether or not this was a strong or weak report. Let me be upfront and say that I thought it was strong. In favor of the Strong Team, we can point to the fact that total nonfarm payrolls increased by +315,000 jobs, above consensus estimates of +300k. However, the Weak Team would argue that the +315k for August was well-below the July results of +526k and point to a rising unemployment rate.
It’s true, the unemployment rate did increase from 3.5% to 3.7% in August, but it’s vital to contextualize how that happened. In order to do that, we must recognize that the labor force participation rate (LFPR) increased from 62.1% to 62.4%. Without get to mathematical, it’s important to recognize that the unemployment rate and the LFPR are positively correlated. Here’s why:
Labor force participation includes people who are unemployed! If someone is unemployed, but not looking for work opportunities, they are not technically counted in the unemployment figure and are instead classified as “discouraged”. When discouraged people re-enter the labor force and begin looking for new opportunities, the labor force participation rate increases and the unemployment rate increases. Therefore, a rising LFPR and unemployment rate is sign of an expanding labor force with less discouraged workers!
Fundamentally, I view a tandem rise in the unemployment rate & LFPR as a net-positive for the economy, so long as it doesn’t continue for too long.
The Federal Reserve is probably looking at these two reports as somewhat of a perfect pitch, because it gives them an immense amount of flexibility to raise rates by either +0.5% or +0.75% in September. On one hand, the rising unemployment rate could indicate that the Fed’s prior rate hikes are finally having an impact on the labor market. On the other hand, resilience in job openings, a high quits rate, and an expanding labor force are indicating that the labor market is stronger than the Federal Reserve would like. Remember, the Fed is attempting to reduce demand in order to re-equilibrate the market at a lower price. Continued strength in the labor market will make this goal much more difficult, as strong aggregate income creates strong spending trends, therefore fueling inflation dynamics.
My gut tells me that this new round of labor market data increases the likelihood of a +75bps rate hike, but there’s still plenty of new data that will be coming over the next 2.5 weeks until the Fed’s next policy decision.
Regardless of whether or not the Fed raises by 50bps or 75bps, this labor market data reaffirms their need to stay on the course of rate hikes, therefore creating even more momentum for yields to rise. Over the course of this week, we saw yields rise dramatically across the maturity spectrum:
5-year Treasury Yields $FVX accelerated by +0.4% to 3.29%
10-year Treasury Yields $TNX accelerated by +1.9% to 3.19%
30-year Treasury Yields $TYX accelerated by +2.7% to 3.34%
With serious issues in the EU economy, and continued efforts by the Bank of Japan to artificially suppress yields, global capital flows continue to funnel into the U.S. Dollar.
The U.S. Dollar Index ($DXY) is arguably the best gauge we have for the strength or weakness of the USD, comparing it vs. a basket of six other global currencies. Most notably, the Euro and the Japanese Yen. Against this basket of six currencies, the U.S. dollar hasn’t been this strong since June 2002!
Here’s the long-term chart of the $DXY, using monthly candles:
In the lower-bound, I’ve added the YoY percent change calculation, which currently stands at +16.3% relative to this time last year. Interestingly, the YoY percent change calculation has exceeded +12% for every month since April 2022. If we zoom-in and look at the $DXY using daily candles since January 2020, we see the details of the recent acceleration:
Unequivocally, we see the production of higher highs and higher lows at each local peak/trough since the beginning of 2021. By very definition, this is indicative of a positive trend and bull market for the U.S. dollar. All year, analysts have tried to fight this trend while predicting that the dollar was going to collapse and decline. These analysts feel vindicated during each brief consolidation period, only to see the dollar make new multi-year highs a few weeks later. Truly, the exercise of trying to identify a peak of the U.S. dollar is futile so long as the Federal Reserve continues to raise interest rates.
Structurally, I became bullish on the $DXY in late-October 2021 as price prepared to break above the grey resistance band. The Federal Reserve’s announcement in November to taper asset purchases gave me a fundamental reason to be bullish on the dollar, and I will continue to be bullish on the dollar in this tightening regime.
There’s a reason why my number one rule in investing is “Don’t fight the Fed”. Could my bullish outlook on the U.S. dollar be wrong? Absolutely. However, I strongly believe that the dollar has tailwinds to rise in a rising-rate environment where the Fed is tightening monetary policy. After another massive acceleration higher, I wouldn’t be surprised to see the U.S. dollar cool off within the next few weeks. If/when it does, I expect it will produce a higher low and then upside momentum will resume. Broadly speaking, this is likely to put downside pressure on the present value of financial assets (bonds, stocks, crypto).
Best,
Caleb Franzen
DISCLAIMER:
My investment thesis, risk appetite, and time frames are strictly my own and are significantly different than that of my readership. As such, the investments & stocks covered in this publication are not to be considered investment advice and should be regarded as information only. I encourage everyone to conduct their own due diligence, understand the risks associated with any information that is reviewed, and to recognize that my investment approach is not necessarily suitable for your specific portfolio & investing needs. Please consult a registered & licensed financial advisor for any topics related to your portfolio, exercise strong risk controls, and understand that I have no responsibility for any gains or losses incurred in your portfolio.