Tackling the Retail Rut
2023.06.07 15:57
The May jobs report was another step in the continuation of a trend that we’ve seen ever since coming out of the COVID recession. Even as several economic markets indicate a slowing global economy with weaker demand for both goods and energy, the labour market is still very healthy and above-average wage growth is reflective of the need to attract workers.
It’s worth noting that the labour force participation rate is finally back within the range it was prior to the COVID shutdown, which could mean there aren’t many workers left to draw into the labour force to fill many of the current openings. As long as the unemployment rate remains below 4% and annualized wage growth stays above 5%, it’s tough to imagine a situation where the Fed gets too eager about loosening monetary conditions any time soon.
Speaking of which, we’re a week away from the Fed’s latest rate decision, which has a real component of uncertainty to it. I think there’s a growing chance that the Fed will consider a “pause then hike” path on interest rate policy similar to what the Reserve Bank of Australia has done over the past year.
The 20% chance of another rate hike this month seems a little low given how we’ve heard multiple central bank members talk about the need for not just another rate hike, but multiple rate hikes. Whether it hikes this month or at the next meeting in late July, it doesn’t appear as if the current 5% Fed Funds rate is the top. The market has pretty much written off the possibility of a rate cut until 2024, which feels appropriate given that the inflation rate is likely to finish the year around the 4-5% range. That won’t make it easy for long-term Treasuries to stage a big rally unless the data really starts falling off a cliff.
The above chart demonstrates how mega-caps are still in control here, but the imbalance may be starting to level off. Since Memorial Day, the has lagged the by about 1%, while small-caps have powered ahead of both.
The tech rally has obviously been overdone, so this is likely due at least in part to an overbought pullback, but the risk-off scenario during the 2nd half of June that I pointed out recently could be in its early stages. Over the past week and a half, utilities look like they’re finally starting to pull ahead and, while it’ll still take some time for momentum to more fully reverse course, the combination of utilities, small-caps and the recent gains in Treasuries suggests short-term conditions could be changing. Risk-off in late June is still in play.
With the SEC finally deciding to go after both Binance and Coinbase (NASDAQ:), it looks like the landscape for crypto is about to turn upside down. By accusing them of failing to register as exchanges, it seems pretty clear that Gary Gensler is trying to claim at least some level of regulatory oversight on the crypto industry.
I’d assume that the SEC will keep going after other exchanges, which means we could soon see a mass exodus out of crypto. One of the big selling points of crypto is the lack of oversight. If the SEC is going to step in and try to strong-arm the exchanges, some traders might decide to get out before their money gets potentially tied up. I don’t foresee a scenario where the demand for suddenly dries up, but I wouldn’t be at all surprised to see several of the other coins plunge in value.
