QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — The latest JOLTS report yielded another vote for wage disinflation from the quits trend and an ongoing cautious labor demand picture. Service industries are in the crosshairs for underperformance, and the July NACM Credit Managers’ Index indicated tighter service sector credit conditions that could be acting as an impediment to adding headcount. This makes a downside disappointment for Friday’s NFP a reality. Negative hires-separations spreads in May and June versus positive NFP gains add to the downside risks.

TAKEAWAYS

  1. Despite the upside surprise, JOLTS Private Quits fell 1% YoY in June, the 43rd negative print in the last 46 months; the current streak takes out the 33 negative months during the GFC and flags further easing in average hourly earnings from June’s 3.5% YoY pace
  2. Job openings, Hires, and Quits were all rising YoY in June for the Manufacturing, Wholesale, Retail, and Other Services sectors; by contrast, Information, Education & Healthcare, and Leisure & Hospitality saw all three metrics decline YoY
  3. NACM Services Rejections of Credit Applications fell to 45.2 in July, the fourth lowest print in data back to 2005 and well below the long-run average of 50.6; by contrast, the same gauge for the Manufacturing sector, at 51.5 in July, is in line with its 51.7 long-run average

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 — 8.1.26

Who needs the World Cup when we can still keep score? This week’s winner was IQ, which beat EQ in a penalty shootout. With self-awareness off guard after an incredible run, intelligence quotient moved in swiftly to score the winning goal. The Wall Street Journal’s forensics recapped the ‘game’:

The 2024 Setup: “After getting fired for leaking what OpenAI considered sensitive information to Holden Karnofsky, the husband of an Anthropic executive, (Leopold Aschenbrenner) published a 165-page essay, ‘Situational Awareness: The Decade Ahead,’ that foresaw the path of AI's development -- and went viral.

‘Right now, there are perhaps a few hundred people, most of them in San Francisco and the AI labs, that have situational awareness," he wrote. “Through whatever peculiar forces of fate, I have found myself among them.”

Continue Reading

 

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