QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — After a brief spring surge, labor market flows have taken a decided recessionary turn. The boomerang in Leisure & Hospitality is especially foreboding when combined with falling U.S. hotel occupancy. There are few catalysts that suggest a turnaround in discretionary services spending, which will collide head-on with stubborn shelter and wage disinflation. Traders will soon be compelled to connect their own dots given Fed policymakers’ newfound silence on all matters macroeconomic with the notable exception of Chair Warsh’s warning that financial conditions remain too loose. With the riskiest high-yield spreads gapping, the potential for broader credit market dislocation is growing.

TAKEAWAYS

  1. At 61.5%, the labor force participation rate fell to a level last seen in June 1976, excluding the initial COVID shutdown; both the LFPR and the employment-population ratio peaked at the turn of the century, just before China’s WTO entry, and they’ve yet to recover since
  2. On a 3MA basis, full-time employment fell 3% in June, a 6th percentile print that is typically breached only in the depths of recession; contrary to expectations of a World Cup surge, Hospitality Worker NFPs fell 221,000 in June, the worst non-pandemic print on record
  3. Nonfarm Household Employment, a proxy for NFPs, fell 668,000 in the first five months of the year while NFPs rose a net 392,000; their current 1.06 million spread is the fourth largest on record, and Nonfarm Household Employment’s decline is consistent with recession

LONG MACRO

Recession probability to rise into 2025’s second half as private demand underperforms. The tariff shock should generate greater risks for a downshift in business investment and a more challenging environment for consumer cyclicals vis-à-vis consumer non-branded noncyclicals.

Manic shifts in U.S. politics harken first a deflationary gully to cross followed by the threat of impeachment and ultimately, a fourth change in administrations in as many U.S. presidential elections, a first in sequential terms since the precipice of the U.S. Civil War. The subsequent pendulum swing will manifest as Universal Basic Income/Modern Monetary Theory, and with it, the secular rise in inflation being prematurely predicted today by those positioned to profit from being short Treasuries.

Saturday Intelligence Briefing — 7.4.26

Happy 250th Fourth of July! We couldn’t be any happier to be sharing your Saturday morning coffee with you today, though it may be iced given the heatwave that’s swept the nation. Before we get started with all things macro and markets, we encourage you, once again, to read Peggy Noonan’s three-part series in the Wall Street Journal commemorating the nation’s Semiquincentennial. We covered the last – “The Tartan Army Takes America” in our Weekly Quill -- a lighthearted and relevant look back at the parallels and dissimilarities between today and the U.S.’s Bicentennial.

Our favorite, though, was her look back at Rocky, released in November 1976 but filmed starting that January. She contrasted the bad with the movie’s effect, which was good: “Movies, like people, have a historical context, and Rocky’s was Watergate, Vietnam, a bad economy, and high inflation. People were feeling stupid to have believed all those things they believed in World War II. And the little movie came along and lifted everyone’s spirits, reminded us of the romance in the realism.”

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TACTICAL

RATES:

Short-end and Belly best opportunities for total return. Rally keys off weaker macro. Challenged private demand, higher unemployment and lower core inflation raise Fed rate cut probabilities.

Long-end holds at elevated levels with de facto caps at 4.5% for the 10-year & 5% for the long bond with the term premium supported by fiscal malfeasance exacerbated by falling sovereign revenues and despite diminishing stimulus to the U.S. consumer.

Curve view – Bull steepener in 2025’s second half.

USD:

A sidelined Fed contrasting with most global central banks easing catalyzed a selloff in the greenback. A Fed forced to play catchup could easily thin the massively crowded trade, especially as global trade weakness impairs an open global economy vs. its closed U.S. counterpart.

CREDIT:

•  Underweight HY, overweight strong cash-flow IG

•  Lower-rated buckets at risk of dispersion with Fed Higher for Longer

•  Jobless claims deterioration makes a cautious Street rethink already-wider-spreads 2025 expectations, i.e., up default estimates as bankruptcy cycle speeds up and size

•  Fitch’s acknowledgement of cyclical consumer sector “deteriorating” fits this view

EQUITIES:

OW     Utilities
OW     Fossil Fuel Energy
OW     Senior Living

UW     Consumer Staples
UW     Consumer Discretionary
UW     Large & Midsize Banks

OTHER ASSETS:

•  USD view supports UW commodities & EM

•  Oil is a different story with geopolitical risk ramping (Israel v Iran)

•  Long MOVE to capitalize on runaway lending to Nondepository Financial Institutions triggering a credit event