There are too many unknowns to embolden dip-buyers. That was one generic explanation offered early this week for a low-liquidity summer stock drift made interesting only occasionally by outsized reactions to incremental bits of unsurprising information, or absurd squeezes like that which drove US equities sharply higher on Tuesday.
On Monday, news that Apple plans to slow hiring and spending was “credited” with a shallow equity swoon, for example. To be sure, that was news. Apple is, in some respects anyway, the most important company on the planet. If they’re cautious and that’s set to translate into budget cuts for major divisions, that’s a big deal.
When taken in conjunction with a bevy of reports flagging slower hiring, reduced capex and, in some cases, job losses, at other big tech firms, it’s obvious that Silicon Valley has a “bad feeling” (if not a “super” bad feeling) about “that hurricane,” to mix Musk and Dimon quotables.
Really, though, the attention afforded the Apple story was indicative of a dearth of equity-specific news ahead of the busiest weeks for earnings. “Is a report of slower hiring and spending something that should be unexpected?” JonesTrading’s Mike O’Rourke wondered. “There have been countless reports on, or from numerous companies about pausing hiring and 2023 spending plans,” he went on to say. “It should be clear that such headlines are, and will continue to be, daily occurrences.”
That’s probably accurate, and at some point, the summation of those headlines will amount to a big story. At the risk of being callous vis-à-vis any job hunters who’ll lose the opportunity to be gainfully employed, a big drop in job openings is exactly what the US economy needs.
Again, I should emphasize that the outsized reaction to the Apple story was an indictment of an illiquid tape more than it was a harbinger of recession, but it spoke to a critical question I’ve raised repeatedly this year: Will markets trade evidence of fewer job openings as a constructive development?
Ostensibly, fewer job openings should be welcomed by markets as it’d suggest one key supply-demand mismatch is on the way to resolving. Jerome Powell is (very) fond of citing the ratio of openings to Americans officially counted as unemployed (figure below).
A key pillar of the (now wholly far-fetched) soft landing narrative is that tighter Fed policy and cooler demand will render millions of unfilled job openings superfluous, closing the yawning gap between openings and hires without anyone actually having to lose a job.
That, in essence, is behind the notion that the Fed can cajole wage growth lower, short circuiting the dreaded wage-price spiral, without driving the unemployment rate markedly higher.
Forget whether that’s plausible for now. The point is just that companies will reduce (or freeze) hiring before they start firing people for a long list of obvious reasons. At some point, we’ll likely see a big downside surprise in the JOLTS headline which, you’re reminded, is still extraordinarily elevated (figure below). Such a drop would amount to the first evidence of labor market normalization, and I, for one, will be interested to see how it’s greeted.
The blue dashed line in the figure needs to come way (way) down. Until it does, competition for scarce workers will remain very intense, keeping upward pressure on wages, putting downward pressure on margins and pushing consumer prices higher as companies attempt to pass along the cost of higher compensation to customers. And what are consumers? They’re just wage workers on their days off, who are likely to ask for a raise when they punch in after effectively paying for someone else’s raise at the grocery store, or at a Best Buy, or at a Starbucks the previous day. That’s the “spiral.” Any sign that it’s less likely to become entrenched would be good news.
But, depending on the scope and speed of any meaningful decline in job openings, it could portend a rapid deterioration in the labor market as employers come to terms with the reality of a looming recession. Even if that’s not what it actually portends, markets could perceive it that way and trade the news accordingly. That, in essence, is what happened with Apple on Monday.
As Bloomberg wrote in a separate piece, “for now, most of the biggest tech companies aren’t talking about eliminating jobs, just reducing the rate of hiring [a]nd overall US job growth hasn’t stalled.” Not to put too fine a point on it, but that’s exactly what the Fed wants to see.
Meanwhile, beware the absence of carbon-based lifeforms in equities. “In markets that are perceived to have some degree of efficiency, sharp unearned moves should not need to wait upon a subpar catalyst (like a few cautious headlines out of Apple) to be reversed,” JonesTrading’s O’Rourke went on to say, in the same noted cited above. “As it appears active managers have generally moved to the sidelines, inelastic model-based players and passives wind up chasing the tape.” Sometimes they chase it lower. And, as we saw on Tuesday, sometimes much higher.
