Jobs data and the soft landing

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Good morning. It should be an interesting week. We’ll be keen to see US consumer credit growth Tuesday, Inditex earnings on Wednesday, and of course May CPI on Friday. Data is important when you can’t quite figure out what is going on with the economy. Or maybe you do have it figured out? If so, email us: robert.armstrong and ethan.wu.

The Fed cares about job openings, and so you should too

Investors have mixed feelings about the jobs market. They are enthusiastic about strong demand, the resilient consumer, good corporate earnings and so forth. These things make the chances of recession seem remote, and they are undoubtedly underwritten by low unemployment. At the same time, if the jobs market is too tight, the Fed will have to increase rates more aggressively, which often hurts asset prices and always increases the odds of recession.

This is a familiar paradox. Sometimes good news is bad news. It certainly was on Friday, when the US employment report came in stronger than expected, with 390,000 new jobs created. Stocks and bonds sold off.

The resolution of the good-news-is-bad-news paradox has a name. We call it a “soft landing”. At the moment, there is a popular way of quantifying exactly what a soft landing will look like. It will look like a significantly lower number of job openings without a significantly higher number of unemployed people. A chart:

If openings go down significantly without unemployment going up much, then it’s very likely a recession will have been avoided and, at the same time, the jobs market will have cooled enough to moderate wage growth. That moderation, in turn, will have made a wage-price spiral less likely in the eyes of the Fed, giving them less reason to tighten aggressively.

Well, um, about that. Here is the same chart over 20 years rather than three:

Line chart of Blue line down, red line up showing Good luck with that

Openings have not, historically, gone down without unemployment stepping up smartly. When openings go down that’s usually a prelude to a recession. Is the soft landing a mythical creature?

Fed Governor Christopher Waller thinks it’s absolutely real. He made a big speech to this effect a week ago. His argument, as far as I can follow it, goes as follows.

If you look at the long term vacancies-unemployment relationship, up until the pandemic, on a scatter chart, it looks like this:

Once again, this chart does not make you wildly optimistic about a soft landing (it’s just my second chart, in a different format). In the past, bringing the vacancy rate (job openings/ (employment + job openings)) down has involved big falls in employment. But wait! Waller then adds the pandemic era observations to the chart:

During the pandemic, vacancies were higher for any given level of unemployment. This fits with our intuitive understanding of what the pandemic was like. Fiscal stimulus kept demand strong, but there was a lot of hesitation to work, for a mix of reasons we can have a separate argument about. Waller’s argument is that we can revert to the old regime, moving more or less straight south on that chart, losing vacancies but not jobs.

Why would that happen, exactly? Waller thinks that key is that lay-offs are very low right now. When that is true, the vacancy-unemployment curve is very steep — that is, you can lose a lot of vacancies without many losing jobs. Waller writes that

The unemployment rate will increase, but only somewhat because labour demand is still strong — just not as strong — and because when the labour market is very tight, as it is now, vacancies generate relatively few hires. Indeed, hires per vacancy are currently at historically low levels. Thus, reducing vacancies from an extremely high level to a lower (but still strong) level has a relatively limited effect on hiring and on unemployment.

So vacancies are not generating a lot of hires right now, because there are not a lot of job seekers. So tighter financial conditions, brought about by rate increases, can bring vacancies down without bringing hiring down, because the economy is still pretty strong. That’s the logic, anyway: I’m not sure I buy it. I’m not sure you can do something that makes some employers take down help wanted signs without making other employers fire people.

Whether or not Waller’s argument is correct, it’s useful to know what the Fed cares about. Waller’s paper indicates that it cares about vacancies. In April, job openings and the vacancy rate did fall a touch, and this does not seem to have come with weakening employment. Here’s hoping that was not a blip.

Crypto crashes have consequences

Remember that big stablecoin crash last month?

A $60bn pair of cryptocurrencies, called luna and terraUSD, collapsed. TerraUSD was an “algorithmic stablecoin” fixed to $1 by a tangle of automated incentives for traders — supposedly. The idea was if terraUSD went to 90 cents, you could always swap that for $1 worth of luna, pushing the stablecoin back to a buck. This always looked flimsy, and was. When terra’s peg to the dollar snapped, it sent ripples to tether, an asset-backed stablecoin that acts as crypto’s main channel for dollar liquidity. Tether fell briefly to 95 cents before rebounding to $1.

The terra/luna crash has not been kind to crypto. It has been especially harsh on decentralised finance, a corner of crypto trying to create financial services on public blockchains. The FT reports:

“Confidence in the crypto ecosystem and decentralised finance remains at historically low levels” after the breakdown of terra and luna, said Sipho Arntzen, an analyst at Swiss private bank Julius Baer . . . 

Investors drained $56mn from Ethereum investment products in May, taking this year’s total net outflows to $250mn, according to data from digital asset manager Coinshares . . . 

“As [Ethereum] primarily aims to provide the infrastructure for the emerging world of decentralised apps, we believe that these drawdowns are symptomatic of a loss in confidence in the broader DeFi ecosystem,” Arntzen said.

Terra/luna was a major DeFi project with prominent backers and it failed. Now people are second-guessing the whole space. You can see the loss of confidence in how much capital has fled. Many DeFi protocols ask users to lock up assets in exchange for a yield. As terra unpegged, the amount of assets committed to DeFi protocols plunged nearly $100bn:

Line chart of Total assets pledged to decentralised finance protocols, $bn showing Commitment issues

This partly reflects declining crypto prices, as total assets are calculated at market valuations. But in the last month, assets committed to DeFi fell 48 per cent while crypto’s overall market cap was down 30 per cent. Outflows make up the difference.

Meanwhile, regulators are bearing down on asset-backed stablecoins. On Friday, Japan passed the first major law governing stablecoins, essentially mandating that they work as advertised. Any stablecoin issued in Japan must be linked to the yen (or another legal tender) and holders can always redeem one at par. The law only lets licensed entities like banks issue stablecoins. (Mitsubishi UFJ is cooking one up for 2023.)

The UK is following suit, but with a lighter-touch approach. Its regulatory proposals would likewise require stablecoins to do what they say on the tin. But, as part of the UK’s bid to become a global crypto hub, more companies would be allowed to issue stablecoins. Instead there is a backstop: the Bank of England would have the ability to take control of stablecoins deemed systemically important.

New rules, if they take root, could disadvantage players like tether, with its seedy past and penchant for secrecy. Perhaps tether might start embracing its role as the unregulated stablecoin, much as some bitcoiners want bitcoin to become “freedom money”. But rejecting the mainstream is hard, and harder still starting from a position of weakness. (Ethan Wu)

One good read

“Your professional self makes presentations to the board and says things like: ‘Let’s get the analytics team to kick the tyres on this.’ Your whole self cannot operate a toaster and says things like: ‘Has anyone seen my socks?’”

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