“You don’t know about real loss. Because that only occurs when you love something more than you love yourself. I doubt you’ve ever dared to love anybody that much. I look at you, I don’t see an intelligent, confident man. I see a cocky, scared-s***less kid. But you’re a genius, Will. No one denies that. No one could possibly understand the depths of you. But you presume to know everything about me because you saw a painting of mine. You ripped my f***in’ life apart. You’re an orphan, right? Do you think I’d know the first thing about how hard your life has been, how you feel, who you are because I read Oliver Twist? Does that encapsulate you? Personally, I don’t give a s**t about all that. Because you know what? I can’t learn anything from you that I can’t read in some f***in’ book. Unless you want to talk about you. Who you are. And I’m fascinated. I’m in. But you don’t want to do that, do you, sport? You’re terrified of what you might say. Your move, chief.”
Nothing beats Robin Williams at his improvisational best as Dr. Sean Maguire in Good Will Hunting. The Academy of Motion Picture Arts and Sciences agreed awarding him Best Supporting Actor.
The markets’ MOVE is making its own move. The index of implied Treasury yield volatility is typically plotted against other financial market metrics like the VIX index of equity volatility or measures of credit default risk, such as the CDX for investment grade or high yield credit.
By improvising, we can also use an inverted MOVE to illustrate the macroeconomy (light blue line). Our ‘raw material’ is Monday’s Dallas Federal Reserve manufacturing survey, which improved to -3.0 in October versus the -9.4 consensus and September’s -9.0. Production flipped to an outright expansion with the report indicating it had, “shot up 18 points to 14.6, its highest reading in more than two years.” This said, at -6.0, the New Orders-Finished Goods Inventories spread posted its fourth straight contraction (lilac line). The production index notwithstanding, after the positive run in four of five months ended June, this re-weakening cannot be dismissed. The MOVE concurs. Turning points in rate vol have uncannily tracked the Lone Star State’s factory sector supply-demand balance for some time. The MOVE’s October-to-date surge above the 120 level suggests excess supply conditions in the nation’s largest exporting state will worsen in the near term.
The upsurge in the MOVE index also is running parallel to a massive jump in Texas manufacturing productivity. Plotting the Current Production index and subtracting the sum of the Current Employment and Workweek, a proxy for hours worked, shows an almost 90-degree move upward in October to 25.2 from -3.6 in September (teal line). The 28.8-point swing was the second largest since the series’ 2004 inception. Moreover, the only higher reading on record occurred at the depth of the Great Recession as the bankruptcy cycle reached its apex (teal dashed line). The magnitude of the current surge in productivity demonstrates that Texas industrial firms hugely favor capital over labor. Stated differently, manufacturers are squeezing marginal output from their workers because they can. This is a prime example of why coincident production news should never be viewed in a vacuum because it can exaggerate the present state of play. Take it from the mouth of a surveyed fabricated metals manufacturer: “We are expecting a continued period of lower demand and production over the next six to 12 months. We have flexed down our workforce and supplier purchases accordingly.”
Incorporating the Dallas Fed hours worked proxy also informs Friday’s U.S. jobs data. October’s reversal, to -10.6 from +0.4 in September, erased the gains made in the prior nine months (orange line). Moreover, the current level reinforces the current industrial recession given the history of the last two decades (orange dashed line). With fewer working and those who are working racking up fewer hours on their virtual punch cards, the recent reprieve in the year-over-year (YoY) trend in national manufacturing aggregate hours should prove short-lived (purple line). We foresee downside risk to U.S. Industrial Production, which contracted throughout the third quarter (-0.5% July, -0.2% August, -0.7% September) and could soon recapture its January 2024 post-pandemic low of 1.2% YoY.
Not only does the deterioration in hours worked conflict with the pop in Texas production, but it also validates evidence of excess supply. At -4.9, Future Inventories were largely unchanged with September’s -5.0 (yellow line). Over the last 30 months, only six readings sported plus signs, which flags persistently diminished pricing power. Little wonder Texas manufacturers favor capital over labor, a profit-boosting stance. Consider this color from a Texas printer: “We are now in month two of much slower business activity, something we have avoided for the previous 10 months. Hopefully, things will pick up soon, or else we will need to reduce head count in the plant. Naturally, this comes just as a huge capital expenditure machine has arrived and is in the process of being installed and training beginning.”
Broadening out to the nation as a whole, we see zero coincidence in consumer price inflation for durables (blue line), nondurables (green line) and core goods (red line) following the path drawn by the Dallas Fed’s Future Inventories. Continued supply depletion will maintain pressure on goods deflation downstream. To one Jerome Powell: “It’s your move, chief.”