US September non-farm payrolls blew through the consensus expectation but the totality of evidence from the employment report suggests that the labour market continues to cool. 

Including upward revisions to the prior two months, 455,000 jobs were added to the payrolls tally in September. However, this follows three weak months when the revisions-adjusted gain averaged 105,000 – see chart 1. 

Chart 1

The alternative household survey employment measure – which counts people rather than jobs – grew at half the pace of payrolls in the three months to September – chart 2.

Chart 2

The relative strength of payrolls partly reflects a further rise in multiple job-holding, which is approaching its pre-pandemic peak, i.e. the relative boost may be ending – chart 3. 

Chart 3

Stepping back, stronger growth of payrolls than GDP since end-2021 represents a catch-up following a big undershoot of trend during the pandemic – chart 4. 

Chart 4

The catch-up appears complete, suggesting that payrolls will resume slower growth than GDP. The slope of the trend line implies a fall in payrolls if GDP growth declines below 1% annualised. 

Temporary help jobs have led at prior peaks and troughs in payrolls and continued to decline in September – chart 5. 

Chart 5

The unemployment rate, meanwhile, held at its higher August level, with the demographic breakdown showing a sharp jump among prime-age males – chart 6. 

Chart 6

Verdict: neutral / negative – headline surprise offset by weaker internals.

Global monetary trends appear inconsistent with economic expansion and recent levels of financial asset prices. Central banks are likely to be forced to reconsider policy stances, by market / financial instability and / or unexpected economic weakness.

Key developments during Q3 included:

• Global composite PMI new orders – a timely indicator of economic momentum – extended a decline from a local peak in May.

• Global six-month real narrow money momentum fell to a new low, suggesting a further PMI slide into early 2024 – see chart 1.

• Inflation news was favourable, with US and Eurozone core momentum slowing significantly.

• Major central banks ignored these developments, tightening policies further and signalling “higher for longer”.

• Hopes that Chinese easing would act as a counterweight to G7 restriction were dashed by the PBoC allowing money rates to firm significantly into quarter-end, perhaps reflecting concern about capital outflows.

• Global “excess” money momentum, as measured by the differential between six-month rates of change of real narrow money and industrial output, became more negative – chart 2.

• The stock of excess money, i.e. the ratio of real narrow money to industrial output, fell to its lowest level since February 2020 before the covid policy response and associated monetary surge.

• US real Treasury yields extended a third major move higher since late 2021, interpreted here as reflecting the intensified excess money squeeze coupled with higher for longer guidance.

• Global equities gave back most of their Q2 gain as higher real yields dragged valuations lower.

• The yield surge contributed to underperformance of growth and non-US quality while restraining outperformance of defensive sectors.

Chart 1

Chart 2

Current and prospective monetary trends appear too weak to support recent levels of economic activity and market wealth. Two scenarios for relieving the monetary shortage may be considered.

In the better scenario, a further fall in inflation coupled with modest weakness in activity results in global excess money contraction moderating into end-2023, with an associated reversal lower in real yields. (Equity market performance is related to the sign of the level of excess money momentum while yield movements are related to the sign of the rate of change.)

Inflation progress and softer labour market data prompt central banks to retract higher for longer guidance and cut rates in early 2024, extending the move lower in yields. Falling yields support growth and quality, limiting weakness in equity indices.

Lower rates revive nominal money momentum in H1 2024, laying the foundation for an economic recovery during H2. Inflation continues to fall as core / wage pressures fade, moving to an undershoot in late 2024 / 2025 in lagged reflection of monetary weakness in 2022 / 2023.

Equity markets recover during H1 2024 as excess money momentum turns positive. Near-term outperformance of defensive sectors reverses as improving economic prospects for late 2024 / 2025 lift cyclical areas.

The suggestion in this scenario of modest / short-lived economic contraction is consistent with the cyclical analysis framework employed here: major downturns in the housing and business investment cycles are not expected before 2025, while the stockbuilding cycle is scheduled to recover in 2024.

In the worse scenario, recent policy tightening and surging yields result in a further fall in nominal money momentum, offsetting the impact of lower inflation and declining activity on real / excess trends.

Real yields are stickier and equity markets fall further, with defensive sectors outperforming significantly.

Intensified economic weakness and an ongoing monetary shortage trigger one or more credit “events”, raising financial stability concerns. Central banks cut rates but are viewed as having lost control. Investors price in a tail risk of excessive easing and another inflation surge later in the decade.

Inflation falls faster and further than in the better scenario, contributing to a larger eventual decline in rates and Treasury yields. The beneficial effect on monetary trends, however, is delayed by “endogenous” tightening via wider credit spreads and wealth losses.

The suggestion in this scenario of significant multi-quarter G7 recessions could be reconciled with the cycles framework by arguing that the rate shock advanced the housing cycle peak expected around 2025, i.e. the downswing will play out over 4-5 years rather than a more normal 2-3.

The subjective probabilities assigned here to the two scenarios will be adjusted in response to incoming nominal money data.

The further fall in global six-month real narrow money momentum in Q3 was mainly attributable to declines in China and India, confirming a need for PBoC easing and questioning consensus optimism about Indian economic prospects. Momentum remains weaker in Europe than the US – chart 3.

September manufacturing PMI results are broadly consistent with the real money momentum ranking – chart 4 (rank correlation coefficient = 0.76). Minor anomalies include India, Brazil and Switzerland (downside risk to current PMI ranking suggested by money trends), and Japan and Sweden (upside).

Chart 3

Chart 4

This is the second in a series of short posts focusing on whether incoming economic news supports or contradicts the forecast of a global “hard landing” suggested by monetary trends.

The US ISM manufacturing new orders index rose to a 13-month high of 49.2 in September, apparently supporting soft landing hopes.

A post in July flagged the possibility of a near-term rebound but suggested that this would prove to be a “head fake” preceding a move back below 45. 

The main reason for expecting a recovery was that the stockbuilding cycle was judged to be moving towards a low, i.e. a drag on new orders from customer inventory adjustment was likely to abate. 

The reason for expecting the recovery to be brief and followed by a relapse was that US real narrow money momentum remained heavily negative, suggesting that a stockbuilding boost would be outweighed by weakness in final demand. 

Historical instances of ISM new orders recovering through 50 when real money contraction was negative include 1957, 1970, 1980 and 1990. The orders index subsequently fell back below 45, with the relapses associated with recessions – see chart 1. 

Chart 1

Six-month real narrow money momentum has recovered since mid-year but remains significantly negative. 

The earlier suggestion of a recovery in ISM new orders was supported by a sharp rebound in Korean FKI manufacturing expectations between February and July – Korean exports are sensitive to changes in global industrial momentum. FKI expectations relinquished most of the February-July gain in August / September. 

Verdict: inconclusive.

Eurozone / UK CPI momentum continues to normalise in line with the profile of broad money growth two years ago, a relationship suggesting a return of annual inflation to target in 2024 and an undershoot in 2025.

The six-month annualised rate of increase of Eurozone consumer prices (ECB seasonally adjusted measure) was stable at 3.3% in September but core momentum (i.e. excluding energy, food, alcohol and tobacco) posted another hefty fall from 4.0% to 3.4%, the lowest since January 2022 – see chart 1. 

Chart 1

The current rates of increase are consistent with broad money momentum two years earlier: six-month growth of non-financial M3 had slowed significantly but still ran at about 6% annualised during H2 2021. 

Broad money growth of 4-5% pa is compatible with the 2% inflation target over the medium term. (The ECB’s “reference value” for M3 growth under the now-demolished monetary pillar was 4.5% pa.) Six-month momentum moved into this range from Q2 2022, suggesting that the six-month rise in prices will return to about 2% annualised around Q2 2024, with annual inflation following later in the year. 

The six-month rate of change of broad money broke decisively below 4% annualised in early 2023, moving into contraction in May. The message is that CPI momentum is on course to undershoot in 2025 unless the ECB reverses policy tightening and generates an early / significant rebound in money momentum. 

The six-month annualised rate of increase of UK seasonally-adjusted consumer prices slowed sharply in August but was still above the Eurozone level, at 4.4% versus 3.3% – chart 2. UK and Eurozone six-month broad money growth was identical in August 2021 (6.1% annualised) but earlier strength had been more extreme in the UK, possibly contributing to higher current inflation. 

Chart 2

Six-month broad money momentum, however, fell more sharply in the UK than the Eurozone in late 2021, while the UK increase broke below 4% annualised six months earlier, in July 2022. The suggestion is that the UK inflation decline will catch up with or move ahead of Eurozone progress over the next six to 12 months.

This is the first of a series of short posts focusing on whether incoming economic news supports or contradicts the forecast of a global “hard landing” suggested by monetary trends. 

Flash results suggest that the global composite PMI new orders index – a timely indicator of demand momentum – fell for a fourth month in September, consistent with the monetary signal of a slide into early 2024, at least. 

The flash results, available for the US, Japan, Eurozone, UK and Australia, imply a decline through 50 to the lowest level since December, assuming no change in all other countries in the global aggregate – see chart 1. 

Chart 1

Weakness in the flash surveys was driven by a further slowdown in services new business, with manufacturing new orders little changed – chart 2.

Chart 2

Any hopes of manufacturing stabilisation, however, may be dashed by full September results incorporating China and other emerging economies. The equity analysts’ earnings revisions ratio correlates with Chinese manufacturing PMI new orders and weakened sharply this month – chart 3. 

Chart 3

Renewed deterioration in Chinese / Asian manufacturing is also suggested by the Korean FKI survey for September, showing a relapse in the assessment of business prospects to the weakest since February – chart 4.

Chart 4