Surveillance: Labor Market with Richardson

the adjustment forward. She is with a DP automatic data processing, is with our question most locked into our paychecks of any company in the country. She's their chief economist. Nila Richardson adds value. Nila, good morning to you, Um Nila, I really want to focus in here on what a d PC is. Not your proprietary stuff. I don't need the state secrets, but with the advantage of your payroll knowledge, what did you learn Friday and how does it amend

your view forward? Well, we we learned that our firms are clients over a million clients that are still hiring rather aggressively. We also learned that that hiring intensity is coming from small and median firms that were blocked out through a lot of the hiring in two outmanned by larger firms when it came to benefits and wages. And then the third thing we learned, and I think this is really important when you talk about the next steps

for the FED, is that wages are moderating. They are um, but they're not moderating quickly enough to make even a two percent inflation target seemed reasonable. At this point, they're still quite high, almost double what they were going into the pandemic. So there's still a lot of work to do when it comes to wages and getting them down to a tolerable UH pace of growth that meets the FED target. The economist John Pharaoh is really emphasized the I S M numbers on Friday is well, they show

some soggyess. How does Nila Richardson define a soft landing? I have trouble with that phrase. But if we don't like the phrase soft landing, where are we going with that optimistic outcome? Well, to me, a soft landing as a landing you can walk away from. And I think the economy is strong enough right now at least it looks like that it'll do. So we pretty much got a Goldilocks report on the six um And I'm gonna

say more about that in a second. But we got a report where you still saw a strong jobs growth and moderating wage growth. That's like the perfect scenario for a soft landing. The question is will that trend continue? And I think what people get wrong about the current state of the labor market is that all of this is cyclical, that it can be controlled by a slightly

higher interest rate. Much of what we're seeing in the labor market right now is structural, and if you look at the hard data, you'll see that employment growth over the next decade is expected to be half of what it was the previous decade. That means labor shortages are persistent, and this vector of higher wages, especially in the service sector,

will be with us for some time to come. So, in other words, Nila, if I were going to sort of put a bow on that, are you basically saying that hope of a soft landing based on the print that we got on Friday is perhaps more wish than reality. I'm saying that the doors still open, actually, but that door swings both ways. Uh. We still have a robust labor market three and a half percent unemployment rate. I mean,

there's no getting around that. That's a strong labor market, and we're seeing initial jobless claims barely above two hundred thousand. That's a really strong labor market. However, that's a labor market that's also at risk of higher wage pressure at every turn. So this idea that the Fed can just get to this terminal rate and then pivot to me

that door is closed. Uh, where I expect to see federal funds rates higher for longer, for some time to come, because the labor shortages aspect of the labor market isn't going away. Well, people to point to the services im which you mention that was weaker than expected, that came in with contractionary territory, and then areas like the housing market that have seen incredible destruction in terms of how much prices have come down, perhaps not that significant, but

certainly the volume of sales. How much more is there to go in some of the industries that have been first hit by some of the tightening FED funds rate. Well, let me point out that the housing The issue with housing is more structural than it is cyclical. It's not just higher mortgage rates. People have bought housing a much higher mortgage rates than what we're seeing now it's about

the monthly payment. What we're seeing in housing is just the lack of inventory and that had set a supply issue that has been an issue for over a decade, and that supply issue is likely to get worse with higher interest rates. So that's something that is structural the But to get that to your question, Um, we can't expect the labor market to behave in a uniform way. This is a very fragmented market, and so you're seeing

interes straight sensitive sectors like manufacturing start to slow. We've seen that firms that overhired last year, like information technology, they're starting to pause and slow. But at the same time, when one door closes, another door opens. You see that in the Jolts data there's still a lot of job openings and there are firms waiting in line to scoop up that headcount right now in this very tight labor market.

Well that's where I wanted to go. Look, I mean, I don't know if you've got any interior knowledge on this, Nila, but let's go there with all the bias. You have an excellence with a DP. There's this tech hemorrhage going on right now. Do those people find jobs. It's too soon to tell how quickly they find jobs, and I think that underlies your question how quickly they find jobs. We don't expect them to be part of the long term unemployed of six months or more that you see

in other parts of their segments of the population. But it's how quickly they are observed. And my feeling and is that those skills are readily observed absorbed, not necessarily in tech, but in other sectors of the economy that benefit from advanced tech and data skills and software development.

Some of these UH technologies that were really important during the pandemic have now gone mainstream, and companies are more likely to need tech tilent in the future than less, so I expect that these numbers will be quickly absorbed. Though it's highly disruptive for people in the short term. This is really really important, And Lisa, would you agree with me? This is in the zeitgeist that that there's a lot of carnage going on in technology, But I'm sorry,

there's an American job economy out there. Maybe maybe on a on a stock basis or the hopes of a tech stock boom, you don't make the same compensation but it's not like they're going out into a nothingness, which is the reason why we haven't necessarily seen it in some of those numbers. Nila, this really racist a question, at what point do we start to see the destruction in the numbers that we're seeing in certain industries. Are

we ever going to see it? Could we see a recession without necessarily an unemployment rate that picks up all that much? If we daily said it will be the weirdest recession in US history. I mean, I start from first principles, the jobless claims numbers. Those numbers are super low, and then I add the unemployment rate fifty year low, and then I see the best hiring. And yes, there could be some softness next year, and we could see

weaker hiring next year. But the fact that firms are still hiring when all expectation is that the economy is slowing, slowing significantly from last year and definitely from that means makes the hiring even more remarkable. It tells me that what we're seeing is impervious to interest rate hikes, that there's something more going on, and that companies still need to hire and find qualified talent. So Nila, just to

sort of wrap this all up. You said that you think that this ultimately will push the FED to raise rates to a higher level for longer and keep it there for longer than people currently are expecting. Can you give us some parameters of what you're expecting and when it will be felt by an economy that still has been resilient. Yeah. I don't know if the FEDS path

is through the labor market. I know the narrative is that if we can cripple the labor market, we can slow down hiring, we can spike up the unemployment rate, and that we can crush wage pressures. That's going to lead to lower inflation. I'm not sure that's the path anymore. I think what we need actually is to see more people into the labor market, and unfortunately, what that means from for the FED is that it's not just a

monetary response response, it's a fiscal response. So jobs retraining response is to get people into those interviews, response which needs more federal and local support, not just monetary support. So the idea that the FED can do this alone and fix the labor market, bring down inflation, and get people back into the labor market is I think is a little idealistic, so the Fed can only stay in

its lane. I would expect to see a federal funds rate over five per cent, and I would expect them to hold there for a quite a bit of time. That means through Nila, thank you so much. A breath from Neila Richardson of ADP. Joining US now is Laurie Canvasina. How do US ancurity strategy? Obviously capital markets? Laurie, let's start there. Well, Lisa finished the bank earnings this week. What are you looking for from the likes of JP Morgan and others to get a broader rate on what's

happening here? Well, I always love hearing the comment from the banks about what's going on in terms of consumer deposits. Um. We also like hearing, you know a lot about what's going on with our corporate clients. So that's really you know, Frankly, I care a little bit less about the actual bank earnings and I care more about those macro tidmets that we're gonna get. But I have to tell you, John, I pulled up this morning just looking at my Bloomberg

about the sector performance over the past month. Financials have actually done pretty well in a relative basis, And I never liked that set up when financials have outperformed heading into recording season, because there's usually not that great at a set up. But we'll see what happens on Friday. Or I'm fascinated by the interviews we have away from your expertise talking about bi quality, which means Apple and

three other stocks. Are there qualities small caps? I mean, if if somebody says in a big cap area, I want quality, can Laurie Kelvisina say that in mid caps and small caps you can. It's on a relative basis, and you don't necessarily, you know, have the ability to come in and make the argument to say your top quality small cap is better than you know, kind of

your top quality of large caps. But within the small cap space, you to generally tend to find that stocks with better r o e s positive earnings tend to outperform over time. You really kind of have two different worlds within the small hap index. Is you have the teeny tiny microcaps that have no liquidity, nobody trades, that nobody pays attention to them, and they have that kind of upper echelon that does have some pretty good quality. Now, those typically get to be pretty crowded by small cap

managers and typically get to be pretty expensive. But one of the reasons I love small caps right now is that upper echelon of market cap is actually pretty reasonably valued, and we don't get an opportunity to buy those high quality small caps like this all that often. Loria, How concerned were you though, by the I S m print that we got on Friday, the services components supposedly the

strongest one coming in in contraction. Look what, whether or not this is a recession, something close to it, that's something that kind of smells like it but isn't quite this one. Whatever it is, we need to go ahead and get it done, and we need to go ahead and get it started. From an equity market perspective, and obviously there's a human cost to that, and we're we're

not being disrespectful of that. But from a market pricing perspective, markets typically actually do well in negative GDP years and don't do well and sluggish GDP years, And that's historically because markets really can't handle that. Will we won't will we won't we They just want to know. They just want to rip off the band aid and get back to business. I think that certain parts of the equity market, like small caps, have been pricing in a plunge in

I s M manufacturing for quite some time. The services side, though, is really what's been kind of feeding, uh, you know, kind of the the inflationary fears, and so I do think we needed to see some damage there really to kind of get this inflation narrative under control once and for all. So we talk about what's priced in, right, That's been a sort of one of the big question marks for a lot of the analyst reports we've been reading.

And you took a look at how tech consumer discretionary communication services stocks accounted for of the decline last year on the SMP. But tech is still overvalued by some measures. So at what point how much more damage is necessary in that sector to become appealing to you. So I think that tech is an area if we do get another ballot of market volatility in the first order, and I do think that we're probably going to see that

once reporting seasons set send. I do think that tech is going to have a problem because I do think that that's where some of the earnings expectations do still need to be pulled down um and typically we really want to buy tech as a recovery story, so we need to put that market bottom in before we can really get to a point where you want to buy

the tech sector. But the we go back to this quality issue, Lisa, because if I take a look at all the SMP five hundred sectors and rank them in terms of quality, that classic tech sector, software, semi hardware, that component that really ranks is the highest quality part of the SMP five hundred. So you might not necessarily get super cheap valuations before investors will move back in.

We do probably need to get better valuations, or at least more certainty around valuations than what you've got right now, before you'll really see sustainable buyers come back. We're spent the weekend trying to calibrate the gloom in economics. We're seeing a lot of gloom. Are you seeing an investment and it's linkage over to finance? Are you seeing a

lot of gloom from OURBC Capital clients? We do. I mean I spent a lot of time in December overseas talking to non US based investors, and I would say what was surprising to me, Tom, is that the sense of bloom was probably not as dire as I would have expected, and not quite as dire as what I would have seen just from talking to US based investors.

Still pretty low, UM, but I got the sense that talking to non US based investors, they were starting to sense opportunities out of the US, and so they were still concerned generally that the US was overvalued. But I was hearing actually sort of a benign discussion coming out of European based clients in particular, UM, And that was

something that surprised me. It felt like maybe we had in certain corners of this market really saw that gloom start to receive just a little bit, and that is something you do tend to want to look for at market bottoms. You can fill this hope count for twenty three that this is the year that you get that international performance. Tom before that, I know, Laurie, thank you.

Just fantastic. Laurie Cavastin of MBC Capital Markets, Let's just gotta writes holistic notes pulling in the economics into the fixed income space as well, and his recent note John, I mean, it's just extraordinary in its nuance, not only in the United States, but also the Transatlantic dynamics as well, people lining up to buy fixed income. That's the heart of the matter. That's the heart of the he joins us Sell, Michael Schumacher's global head of macro strategy at

Wells Fargo, with exceptionally acute notes. Mike, your acute note says higher yields. Are we all gonna die if we have higher yields? I hope not, at least not quickly anyway, Tom, and it's it's interesting when you think about the move on Friday. I agree it was huge, but still the bond market has been so choppy, so volwerful now for early the past six months. I wouldn't take too much on a one day's move. A lot of events coming up, a lot of progress and inflation. Sure, but it's not

yet time to signal. Hey, it's all clear for bonds. If we sum it all up into the Bloomberg Total Return index known over the years at Lehman Brothers and such, the answer is down ginormous with a little bit of a bounce. If you call for higher yields. Does the blended total return index seek new loads in price? It depends where you look on the curve time. So if you focus on the front end, you probably still get

positive returns. Let's say the two year treasury. You've got such a high yield baked in that if you alter to go up twenty five or fifty basis points, yes it matters, but it's not going to knock out that four plus coupon in the tenure area. Very different story, a little bit of an uptick, long duration, and you're

looking at negative returns. How much are you going to expect the market to move to a higher expectation of a terminal FED funds rate in a very violent manner as they start to realize that the Fed is serious about what they're saying. It's gonna take a while, I think, Lisa. And the problem is the Fed's credibility, frankly, is not very good if you look back a year. So go back to December of one, take a look at the terminal dot or take a look at the FED fund

and stot for twenty two. At that point it was less than one percent. That didn't work out at all. So I think the market listens to Chair Powell. So yeah, it sounds pretty serious. He's been talking to off for four or five months. But let's see how this pans out. Let's see if the Fed hikes in February. Let's see if the Fed hikes in March. The market's going to give the Fed not much credit, frankly, because the forecasts

have been so poor. Mike, I gotta ask you, because we've been talking about this and kind of questioning how much we have to care about this. Not to shift zones outside of A. J. Powell, but we've been talking about the debt ceiling debate and at what point this bond market will care about the potential for a default at two thousand and eleven. What's your expectation? Is it on your radar. We're more concerned than we would normally be this far out, simply because of all the pandemonium

in Washington over the last week. But the markets seen this movie a bunch of times. So typically people in the market don't care about the debt ceiling until three maybe four weeks before the extraordinary measures appear to be exhausted, and then they care a lot. So cared none, none, none, a bunch and then you see market shift. Equities do strange things, T bill yield spike, that kind of stuff. But we're not there yet. I think it takes a while. Mike. Yeah.

I look at the total Return Index and I know that guys like you are dealing in spread and relative yield analysis. Deborah Cunningham was on last week Confederated and she stopped the show where their caution on, it's going to be a clip a coup on year and prices are gonna go down if we breach last year's carnage in the total return indexs we go back to a price of two thousand and sixteen. Is that feasible that we could see a second year of price trauma in bonds?

Last year was incredible, tom So thinking about the moves in the market relative to where the year began blowing away forwards, I think that's very tough to imagine, not impossible because things have been so strange. But think about let's say monetary policy for the e c B or the Fed. What's the upper bound we'd put on maybe Fed activity this year six percent something like that. So that's much less movement this year than we had last year. For the e c B. Maybe it goes a hundred,

a hundred and fifty. Big moves, yes, but again not really shocking the market as we had a year ago, so I think the idea or at least hopefully the chance of being repeating something like last year in the bond market's pretty small. So you think that this year bonds will offer an offset to the potential risk in higher risk assets in the case of some sort of downturn. I think it's a really interesting point least. And you

think about these correlations between bonds and equities. For let's say most of the last ten years, you have this case where equities that sell off bonds and rallies the bonds would provide that ballast to last year. And more recently it's been oh, yields are down, this is good for stocks, and we had this on Friday too, So we don't have that correlation normalizing quite yet. I think it will, but it's probably gonna take another quarter or two.

Is my guests and Mike quite to catch up. As always interesting was out there at the moment, might show MCADA last fog. Right now, we are going to go to the deepest part of what we do in equities, bonds, currencies, commodities. Always it is a foreign exchange market, and we do it with Rubble Bank with their immense heritage of being on the other side of speculation making commercial transactions. Go Jane Folly holds court at Rubble Bank. Jane, wonderful to

have you here and timely as well. Buried in your note at the bottom is dollar bulls do not give up? Why should the dollar bulls not give up? As we see weaker dollar moving into a trend? Well, you know, I think if there ever was a year of a two handed economists, I think this is going to be the year. There are so many different permutations, accommodations, I think hitting the market, so many different ways you can

argue the issues that are at and I think particularly positioning. Now, I think we've got to look at the events before us through the prism of positioning. And what we've had in the last few months of the year into this year is is the market really selling off and on its long dollar position. So we're going into these fundamentals with the market no longer long dollars and the market very very long euro and that's got to color some

of the some of the news that we've had. Particularly I think around the FED you do this differently because of the heritage of your bank. You people do a lot of hedging a lot of business transactions. Is there a dollar bet on the other side of speculation, Well, you know that there is, yes. I think the answer

to that is yes. But I think if we look at the reasons that the market has been selling off the dollar in the last couple of months, and it's it's surrounding, you know, the attitude towards peak US and of course UH or the Fed now that the fact remains pretty hawkish, I think we can argue this both ways. You know, will the Fed cut interest rates this year? Will it not? There's lots of different views out there, but this argument is going to look different when the

market is no longer long the dollars. And similarly, you know, we look at what's been ramping up the euro long positions over the last couple of months. This is all related to the gas prize, to less pessimism and about the European economic outlook. But again, the news flow is going to hit differently when the markets already long euros.

So I think what we're in for is an awful lot of choppy trading as as as a market reacts to did the inv and flow of of this, you know, very volatile news flow from now this position have been not long dollars and very long euros. What's the range then you're looking for. I think the range is going to be large, you know. And I think this is a new world here, and I would go as far as to say is and did the low volatility that we had, you know, in in recent years was the outlier?

I think that was a function of very cheap money in the coffee, the quantity of easy in years. And with that brain bag, I think all investors are much more exposed to economic fundamentals. They have to look at economic fundamentals and be more worried about it because money is more expensive. And I think that's going to make a much more choppy environment probably probably not just this year, last year, but actually in years to come until perhaps

we we get cheaper money again for whatever reason. So I think we could be you know, seeing your dollar and you know one to two, maybe one eight, one, nine, one ten. You know, I think we've got a lot of shoppiness um to come over the course of this year. Jane, you raised a lot of really good points this question of which data this market responds to. We saw softer than expected inflation prints in Europe with inflation coming in

more than expected. That on the headline number, but that I had to do a lot with the energy prices, not with respect to core inflation. The market didn't respond to that. We see the ECB coming out and saying consistently they are going to high rate more and that they see potential momentum in inflation. What is the market responding to with the optimism aside from just the strength because of the better than expected outcome with the winter

and energy. Well, sometimes the market response to what it wants to to respond, it sees what it wants to see. And actually right now it's ignoring to some of the hawkishness from both the EUCB and from the Fed. And and I think in terms of the European data that we had last week, yes, those headline numbers were coming lower. Yes they're going to come lower because of lower energy prices and and because of base base effects as well into the year, but those core numbers were higher. There

is the effect of tight labor markets. This does make it an unusual down tern because labor markets across almost the whole of the O E c D are so tight, and and this does mean that services sector inflation could remain more sticky. And this is what central banks are worried about. This is why they retain this This hawk is rhetoric and and the warning perhaps that the market you don't get too hut up on the fact that we're going to be cutting interest rates and in the

foreseeable future they may not be. We have to wait and see what's your high beta trade e UM right now? I've got to make some money before our arsenal spurs here this week. And Jane, what's your high beta e M pair right now? Well, we've seen the dollar sell off, we see people go shorter on on the Mexican pay

so I think that's probably going to carry on. But you know, if you talk about this, I always put let to put the Aussie in here because he has traditionally is seen as sort of the high risk trade within the G ten. And actually that's no longer Australia's

running a current account surplus. It's an energy exporter. The interest rate differentials are much narrower than they used to be in and I think that means that Australia is no longer going to be seen as as this sort of high risk currency, and I think that one could perform quite well this year. Interesting Jane, Thank you, as always brilliant Jane Foudy there as Rapid Bank. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern and Bomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg