Weakening Labor Markets
November 30, 2023
Combining relatively subdued initial jobless claims with sharply higher continuing claims suggests that companies have curtailed hiring activity, while stopping short of enacting large-scale layoffs thus far. The surge in interest rates and bond yields has already taken a toll on corporate capex plans. Cutting capex is a relatively painless way to offset rising interest expense, while layoffs are usually a last resort. Without preemptive rate cuts, the Fed’s commitment to higher for longer rates will eventually lead to large scale layoffs. Weak labor markets are the most important piece of the recessionary feedback loop and official labor market data operates with very long lags.
The initial move to lower bond yields is almost always considered an equity-friendly event. The 70bp decline in 10-year yields during the month of November is the biggest move since 1985 and should produce a sharp increase in risk sentiment, especially when growth data has remained relatively resilient. The highest quality stocks rise first, then as the market squeezes higher, investors start to add beaten down, smaller cap names before turning their attention to the highest beta micro-cap stocks. Eventually the cycle exhausts itself, usually in the course of weeks. It’s also important to consider that bond yields may not be falling for ‘good reasons.’ Note that inflation and growth are basically the same thing and disinflation will reduce corporate pricing power. Corporates have enjoyed record pricing power over the last two years, and a loss of pricing power will in lower profit margins/earnings.