QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — Elevated big data on the jobless picture has disconnected with that of raw continuing claims. Rising ranks of long-term unemployed not covered by unemployment insurance against a lower exhaustion rate help explain the difference. LinkUp’s Jobs Created-Removed spread argues that employment could disappoint in early August. Ahead of that report, a drop in June WARN notices suggests that the current fall back in initial jobless claims could continue leading up to the July 29th FOMC. A lower claims profile would leave two market implications to watch: higher near-term rate hike probabilities and a bear flattening of the curve.

TAKEAWAYS

  1. The difference in the YoY paces of LinkUp’s Jobs Created and Jobs Removed gauges has fallen to -4.6 points, a far cry from December’s local high of 12.6; the last time this spread was as inverted, at -5.9 in December 2024, nonfarm payrolls contracted in the next month
  2. The share of the unemployed who have been out of work for 27+ weeks has climbed YoY for 31 months, a streak last seen during the Great Recession; meanwhile, average duration of enrollment in state unemployment benefits climbed to a cycle high 15.75 weeks in May
  3. Revelio’s WARN notice tally fell to 17,637 in July, the lowest since December, suggesting that easing in initial claims since their early June local high has yet to abate; should this trend continue through late July, it could drive higher near-term rate hike probabilities

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