TheBRRR’s Thoughts

The rally in risk-on assets continues, and it’s being driven by the macro backdrop.

As we write this, the Nasdaq has surged back to its all-time high at $18,900 after a brief dip last week, and bitcoin is breaking out above $71,000 - a price it has only touched a few times in its history.

Why is this happening?

We point to the Bank Of Canada cutting interest rates for the first time in four years. Speculators are betting Canada' is the first of many central banks to ramp up debasement efforts.

We also point to the bad jobs data that has hit the tape this week, increasing the odds of multiple rate cuts by the end of the year (chart below).

We’re covering both of these catalysts in the newsletter today.

Weak Jobs Market Could Trigger Rate Cuts: Goldman

ADP Payrolls Unexpectedly Tumble to Lowest Since January, Goldman Speculates It’ll Lead To Rate Cuts

WHAT HAPPENED

• ADP Payroll Decline: In May, the US added just 152,000 private payrolls according to ADP, a significant drop from March’s revised 188,000 and well below the 175,000 consensus estimate​.

• Goldman Sachs Analysis: Goldman trader Cosimo Codacci-Pisanelli highlighted that a near-term Fed rate cut is more likely due to a deteriorating labor market rather than inflation concerns. Fed Chair Jerome Powell echoed this sentiment, suggesting that unexpected labor market weakness could prompt earlier rate cuts​.

• Data Discrepancies: BLS data suggests 2023 nonfarm payrolls were overstated by approximately 730,000 jobs, with much of the overstatement due to inaccuracies in the birth-death model used to estimate business formations and closures​.

WHY IT MATTERS

• Economic Slowdown: The ADP report indicates a weakening labor market with significant job losses in manufacturing, mining, information, and professional services, while gains were primarily in lower-paying sectors like education and health services​.

• Wage Growth Trends: Wage growth for job changers slowed to 7.8% in May from 8.0% in April, while job stayers' wage growth remained steady at 5.0%, reflecting a cooling labor market​ (Fox Business)​.

• Fed's Dilemma: Both the ADP report and BLS data revisions suggest that the labor market is weaker than previously thought. This could accelerate the Fed's timeline for rate cuts to mitigate economic downturn risks​ (UPI)​​ (Anadolu Ajansı)​.

Key Data Points

• ADP Report:

  • Sector Losses: Manufacturing and mining saw sharp declines; information and professional services also lost jobs.

  • Wage Growth: Job changers' wage growth slowed to 7.8%, job stayers' remained at 5.0%.

  • Regional Impact: Job losses in the Pacific West and among small businesses (20-49 workers)​ (UPI)​​ (ADP Employment Reports)​.

• BLS Revisions:

  • Overstatement of Payrolls: 2023 nonfarm payrolls overstated by ~730,000 jobs.

  • True Job Growth: Average monthly payroll increase in 2023 was only 130,000 jobs, significantly lower than reported​ (UPI)​.

  • Impact on Rate Decisions: Potential for significant downward revisions to payroll data in August could trigger Fed rate cuts by September​ (UPI)​.

Strategic Insights

• Labor Market Weakness: Persistent weakness in the labor market, highlighted by declining payroll numbers and slowing wage growth, suggests the economy is not as robust as previously indicated.

• Fed's Response: Accurate labor market data is critical for the Fed's rate decisions. The realization of weaker job growth could prompt earlier and potentially more significant rate cuts.

• Political Implications: The timing of data revisions could have political ramifications, especially if significant corrections are delayed until after the presidential election​ (UPI)​​ (ADP Employment Reports)​.

BOTTOM LINE

The latest data from ADP and BLS paints a picture of a weakening labor market, with significant overstatements in job growth and slowing wage increases. This supports the narrative that the Fed may need to cut rates sooner than expected to address the economic slowdown. Accurate and timely labor market data is crucial for informed policy decisions, and the upcoming BLS report will be pivotal in shaping the Fed’s response.

ZeroHedge

Bank Of Canada Cuts Interest Rates

WHAT HAPPENED:

• Rate Cut: The Bank of Canada (BoC) cut its benchmark interest rate by 25 basis points (bps) to 4.75% on June 5, 2024. This is the first rate cut by the BoC in over four years​ (Bank of Canada)​​.

WHY IT MATTERS:

• Inflation and Economic Growth:

  • Inflation Easing: The BoC cited progress in lowering inflation, with recent data increasing confidence that inflation will continue moving towards the 2% target​ (Ratehub.ca)​.

  • Economic Performance: Economic growth in Q1 was weaker than expected, and employment growth has slowed relative to the working-age population​ (Bank of Canada)​.

• Market Reactions:

  • Future Rate Hikes: Despite the cut, money markets are predicting a more than 60% chance of another rate hike in July, driven by persistent inflation concerns and robust economic indicators such as strong GDP growth and tight labor market conditions​ (Yahoo Finance)​.

  • Monetary Policy Outlook: The BoC remains committed to assessing core inflation dynamics and the outlook for CPI inflation. Future rate adjustments will depend on economic data, including wage growth and corporate pricing behavior​.

• Economic Indicators:

  • GDP Growth: Canada's economy grew by 3.1% in Q1 2024, surpassing expectations and indicating strong household spending​ (Yahoo Finance)​.

  • Housing Market: There has been a rebound in housing market activity, contributing to the BoC's decision-making process​ (Yahoo Finance)​.

SUMMARY:

The BoC's rate cut reflects a strategic shift in response to easing inflation and slower economic growth. However, the potential for future rate hikes remains high as the central bank continues to monitor economic indicators closely. This decision underscores the BoC's adaptive approach to balancing inflation control and economic stability amidst evolving economic conditions.

Yahoo Finance

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.ll