Last updated on October 19, 2022

Marc Chandler, chief market strategist at Bannock Burn Global FX, joins the podcast to discuss the precarious state of markets and what he is expecting from upcoming releases of key economic data. He also provides a pair of investment ideas for these times, with the understanding that nothing here is to be taken as investment advice.

Content Highlights

• The coming week brings a number of crucial economic data around employment and inflation. What to expect (2:50);
• “I don’t think we’re in a recession yet. But I think it’s going to be hard to avoid one.” Cracks are appearing and these warrant attention (3:51);
• Weekly jobless claims (up Thursday) can be a leading indicator of recessions (5:30);
• Non-farm payrolls are up on Friday. What to expect (11:34);
• Core inflation is actually receding from highs, but the Fed can’t (and more importantly won’t) declare victory over inflation quite yet (14:42);
• Recent days have seen a shift in market sentiment, to where a rate cut is starting to be priced in (17:43);
• What is an investor to do here? The guest has two ideas, at opposite ends of the risk spectrum (25:23);

More on the Guest

• Website: MarcToMarket.com;
• Twitter: @MarcMakingSense.

Quick Highlights From Our YouTube Channel

Transcript

Nathaniel E. Baker 0:36
Marc Chandler, Chief Market Strategist at Bannock Burn Global FX. We are talking about the economy. It is a precarious time for the economy. The yield curve just inverted as we record this on Tuesday afternoon, July 5. And there are a number of very important data releases coming up. And this is why I wanted to have mark on the show to talk us through these and to preview them because these are telling. We have job reports coming up. Obviously on Thursday, well, I believe tomorrow, the ADP one. And then Thursday is the weekly initial jobless claims. And then Friday, the non farm payrolls report. And this is something that people have been able to point to as one pillar of the economy that is still holding up, at least on the surface. But you have some other views on that. And then we have the CPI, the major inflation reading next week. So there’s a whole bunch going on here. The Fed tightening, and the markets basically worried now about a recession. And so risk assets have been taking it on the chin lately. And Marc is a good person to speak to all this. So Marc, talk me through this. Where do you see the economy right now?

Marc Chandler 1:53
So I see the economy slowing sharply. I don’t think we’re in a recession yet. But I think that it’s gonna be hard to avoid one. And I wouldn’t be pinpointing late this year, but probably not until early next year, that becomes more evident. And so I think that you’re right that that when you listen to what Powell says, why he justified the 75 basis point rate hike, he says that, partly the labor market is very strong. And of course, you know, we’re gonna get this jolts data, which tells us, you know, how many people are leaving the workforce and quitting their jobs? Those kinds of numbers still show, as Powell was quoted several times, like there’s like, two jobs for the person who’s, who’s looking. And so we get a sense that how strong the labor market is, but I think that there’s some cracks appearing. And these cracks are like, are big enough and lasting long enough to warrant our attention? Okay. First is the weekly jobless claims itself, you mentioned that’s gonna be coming out Thursday. And so here’s what happens, right. These are people who are collecting unemployment benefits for the first time. And these numbers bottomed. So people like me will use a four week moving average, because this is a weekly number, it gets kind of noisy with holidays. And sometimes, you know, one state or another. So use a four month move a four week moving average, to smooth it out that four week moving average bottom and late April. And we are up over 30% off the lows. Now. Now in the past, when jobless claims I remember what we really want to see now it’s not so much the level, but it’s the direction things are moving that really is important. So the levels are still relatively low. But the movement is such that in the past, recessions have often been preceded. That’s why weekly jobless claims are a leading indicator. These recessions have been often preceded by around a 50% increase off the lows. So when weekly jobless claims the bottom are growing very quickly, then they begin rising as the economy slows when they rise for about 50% off their floor that is precede like pre staged a recession. We only about 30% or so now. But it’s something to be watching. Because it is why I don’t think we’re in a recession quite yet. But we’re headed that way. 30% off the lows watch this number, use a four week moving average to smooth out some of that noise.

Nathaniel E. Baker 4:20
You don’t think that we’ll actually have a recession until late this year or early next? Is that right?

Marc Chandler 4:25
So part of it is how you define a recession.

Nathaniel E. Baker 4:29
Yeah.

Marc Chandler 4:31
For a lot of investors, they think about their own rule of thumb that we learned in econ 101: two successive quarters of negative growth. But that is not really a good definition. And the reason I say it’s not a good definition, because we’ve had the recession in the early 90s. And we had the recession of the pandemic. It didn’t last two quarters. And so I would suggest that the this is a nice rule of thumb when you’re at a cocktail party conversation, but when you’re trying to like trying to assess these kinds of things. From an investor’s point of view, I would think that you’d buy a more robust definition. And keep in mind that the real definition is announced by the NBER, often months after the fact. And so we really won’t know what I’m not so sure that whether we’re in a recession or not the key issue here, the key issue, I think, is that the Federal Reserve is raising interest rates, while the economy seems to be slowing. And for me, it’s not just that the feds raising interest rates, but that as much as raising interest rates, but shrinking its balance sheet, but definitely, we are having a fiscal contraction, that is of historic proportions. Last year, we had a budget deficit of about 10 and a half 10.3% of GDP, this year is going to be about half of that. We haven’t had like such a big drop in the fiscal spending. Because when of course, of course, when some people hear fiscal spending, they’re thinking of government of these handouts. And these three lunches, whenever you really think about government spending, think about income, the government’s paying out, when they’re making these transfer payments are spending money, they’re giving money to other people who will spend it. This is this is tantamount to a big loss of income for the US economy. So not only that, it’s not only monetary tightening, fiscal tightening, but you also have this other pattern that I watch. Oil prices have doubled. Before we’ve entered the last three recessions. Oil prices have doubled. Now, they since the since August or so. So and then the other factor for me is a sort of a telltale telltale sign of very late cycle behavior. So what happens? Why are we why we start consuming? And how, how do we find this consumption? Well, partly because we create a lot of jobs. But that’s not really that that helps on the margins. But I’ll tell you what Americans are doing right now. They are borrowing from the past. By going into savings, by taking when they people are refinancing their homes, they’re taking equity out, they’re monetizing that home appreciation, that’s borrowing from the past. And the other thing is that we’re gonna get this number, this coming Friday to consumer credit, with a big lag time, but we get the, we get the main data this week. And the just to put this in perspective, in April and March and April, Americans spent a record amount on credit cards. And so So this, to me is like you know, when you can’t support the consumption, because prices have been inflated, that people are borrowing from their homes, drawing down savings, and borrowing from the future in the form of credit card. And so all these things point to me to like the inescapable conclusion that the economy slowing down very rapidly, and that the Federal Reserve might have to slow down. So they’re going to continue to tighten policy.

Nathaniel E. Baker 7:51
Alright, I’m looking here on the on the jobless claims front, initial jobless claims. They’re expecting another 230,000 for this week, which is also on Thursday. I may have mentioned it was tomorrow, maybe I said that ADP, right? It looks like these are all on Thursday. But and these have been even the four week average is around right around 20 to 30,000.

Marc Chandler 8:13
So it’s been stabilized. So what happened basically was we saw some deterioration. And the last few weeks they’ve been stabilized. And it’s kind of hard to know because of some holidays. That may have skewed it a little bit, but so we weren’t. That’s why we use a forward moving average, to pick up some of that noise. So but to your point, things deteriorated. And now they stabilize a little bit.

Nathaniel E. Baker 8:37
Okay, so what kind of a number are you looking for? Are you expecting this to come up to be higher than 230?

Marc Chandler 8:43
Well, for me, it’s really the direction of the trend. And I think the labor markets deteriorating, and we see this in some of the places in which we started big growth, like the hospitality sector. So what I’m looking at money, I’d be looking more through the monthly Non Farm Payroll number and seeing what sectors are gaining jobs losing jobs, and what this means for hourly earnings.

Nathaniel E. Baker 9:03
Okay, cool. So let’s talk about that. Then there’s the non farm payrolls on Friday. Yeah, what kind of stuff? Are you or are you looking at there? And we’ve had some unemployment now, headlines hitting the news cycle these last couple of weeks with crypto firms, and tech shops and also some mortgage companies, laying people off. So I’m wondering what what that will will look like.

Marc Chandler 9:25
Yeah, so I think this is part of the problem is why like, we see airplane accidents, the newspaper, we don’t see car accidents, right? The companies, the media, for whatever reason, doesn’t typically pick up. employers hiring, hiring, they pick up the layoffs. We got to remember what this Non Farm Payroll number is. In fact, you said to her, like this time, I think the consensus around 275,000 or so, if that’s just a 275,000 people found jobs. what that number represents is the net change in jobs. Millions of people got jobs, millions of people lost jobs. This is a residual number. And when you think about like, how important is it? Because of course, the actual number hardly ever comes out where economists expected, of course. And so how much does it need to deviate in order to be like, statistically significant? I know Federal Reserve paper found that it was about 100,000. Okay, so we get, but the point I would broadly make is that the number of jobs creating is slowing down. Now, 275,000 is still a solid number. But it just shows the direction you want to look at that to like a three month moving average or six months average, you’ll see it’s one of the lowest numbers that we would have had post pandemic. This is just part of what’s happening, right is that we come out of the pandemic, and we have a boom, and then things begin cooling off. And it’s a question of how fast things are cooling off. And so the magnitude of that.

Nathaniel E. Baker 10:55
Right. And now, of course into this, as we’ve said the Fed is raising rates, they did an a 75 basis point rate hike at the last meeting, and it looks like futures are pricing in another 75. Yeah, this coming meeting this month. How long before this starts to have any kind of meaningful impact on inflation?

Marc Chandler 11:16
That’s a good question. Because, you know, Powell admits to that the sources of inflation are not things that are basically coming from supply side of the equation, and the Federal Reserve through interest rates and monetary policy can only really influenced the demand side of the equation. Right. But I would say this that, that the Federal Reserve, and Powell was pretty clear on this, I thought at the last press conference, why? So what’s the relationship between the headline rate and the quarter rate and the Federal Reserve, Powell says, and I think my own work who could like lend credence to that argument to support that argument, that the reason that the Federal Reserve would look at the core rate is not that they exclude volatile ingredients like food and energy, it’s not that they exclude food and energy because they have no control over them. They exclude them for a very practical reason. And that is that over time, the headline rate goes to the core rate, not the core rate going to the headline rate. So the Federal Reserve target the headline rate, but as Powell said, the signal the key signals coming from the core rate. And that’s what I’d like to like to suggest you is that the headline rate looks like it’s going to accelerate still, right? You get that CPI number. I mean, look out of the last like three months, give me this give me the June reader with a consensus has at about 1.1%. And that means three out of the past four months, we’ve had 1% or higher CPI month over month. But I want to say is that it’s increasingly even though a lot of people talk about how it’s broadening out. Increasingly, food and energy are the driver. And I say that because if if things go as economists expect, the rough direction is that hourly earnings when we get that employment number on Friday would have fallen for the third consecutive month, the core CPI is likely to fall into the third month as well. And so this is beginning to shape up as if, yes, we have a problem with headline inflation. But the core inflation, which is a better predictor of where inflation is going, is already rolling over hourly wages are slowing as well, that is still elevated. But the key is the direction the direction is turning. And how we invest in that. I think it’s sort of like the question we used to always say is that the How does it respond to the first hike in a cycle versus the last hike in a cycle? And that’s the same thing. I think for us as investors, we have to think about, not just where we’re going where we are, but sort of the direction things are headed. I think that this suggests that the labor market is weakening, and prices have begun that process of stabilizing and turning lowering that core measure.

Nathaniel E. Baker 14:01
And that would then mean that the Fed doesn’t have to raise all that much more all that much longer. Right?

Marc Chandler 14:07
Well, that’s part of the trick now, is that the Federal Reserve does not want to get bitten by that same dog twice, right? Like everybody, everybody, I’d say their mother accused them of being behind the curve. Biggest mistake the Fed could make is by saying once again, inflation is transitory or declare victory too early. So with the market anticipates that the Federal Reserve right now the fed funds target call it 175. The Federal double that this year, another 175 basis points with as you mentioned, 75 basis points, largely discounted for this month’s meeting. So 100 basis points between the end of July say early August, and the end of the year for four beatings, and that’s 100 basis points. The market is pricing in, but I think the real, the real important thing that happened. It’s just happening. I want to say the last few days In about a week or so, is that the market now is saying, We’ve got well, except for a while, right, the Fed is going to tighten until something breaks. Mark is saying that something’s gonna break, when, right now the market has 25 basis points of a cut price into q3 Fed Funds next year, not this year, they think the Feds gonna continue to raise rates, they’re gonna break something is gonna lead them to cut rates 25 basis points in q3 next year, and another one in q4 next year. That’s already priced into the Fed Funds Futures.

Nathaniel E. Baker 15:32
That’s a pretty far outlook, though. I mean, what can happen in a year and change?

Marc Chandler 15:39
Yep. No, I think you’re right. And it’s true, I think not only are is this stuff, and this stuff, the Federal Reserve, the market, we all fickle, love to change quickly. And the pendulum of market sentiment swings very dramatically. This is where the markets and I think it’s important that up until now, the markets thought that the Fed is going to be able to achieve its target chief would say let some of the dot plot suggested 4% peak in Fed funds. But if you think that fed funds are going to peak about 3.5%, what does that mean for how you want to price in a longer term asset, like a 10 year bond or even stocks? If you thought Feds if you talk overnight rates are gonna go to 4% or higher for the Fed to get control of inflation, it would make me more bearish stocks, the fact that the Federal Reserve, I mean, will not raise rates as much as they thought previously. And that’s what the markets thinking, I think is a I mean, of course, the reason there are going to be raising rates is that we’re worried about a recession, which is a good for risk assets in the first place. But that interest rate, I think, is a real tell of what’s going to happen.

Nathaniel E. Baker 16:46
Yeah, and if you look at the bond market to is kind of interesting, what’s been going on there over the last week, where you’ve seen yields come in, so prices have gone up? Yeah, I think it’s over the last week or so. It was well north of 3%. And now it’s 2.8. And also the inversion that I mentioned at the outset. So that would seem to be I mean, not not to put any words in your mouth. But it sounds like you’re saying that maybe people are a bit early with these bond purchases?

Marc Chandler 17:13
Well, I don’t know. But I think that the long end is one thing. If I thought that fed funds, were going to peak at three and a quarter, three and a half bond yield the 10 year yield above 3%. Seems attractive to me. On the other hand, if you think that’s Feds thought they’re gonna go to three and a half percent. Maybe there’s maybe it’s the two year that looks, that looks a bit rich. But I think you’re right to that, you know, when you think about this bond market rally, what’s happened is, so one of the things we look at our breakeven. So what happens is right, the federal government sells these inflation linked securities, we look at their yield, we subtract the conventional yield against it. And so as to get what is inflation expectation, so a market based view, as opposed to say, a survey. And this market based view is also collapsed. That is inflation expectations are also falling and partly alongside those lower bond yields. You know, we’ve got oil today below $100 a barrel.

Nathaniel E. Baker 18:11
Yeah. So okay, so then that would all speak to inflation that is coming in, but from elevated levels. Right, right. Right. Interesting. But then, but then when there be I mean, if the problem is the headline, inflation, if that comes in high, I mean, there’s still going to be a reaction to that, like, especially if it goes up again, after we’ve all said it was peaking,

Marc Chandler 18:32
yet. No, I It’s true. And it’s like, what you say, I think it’s very important. And that is that we have to be prepared that inflation is not probably has not peaked yet. To headline inflation is it could still go up. I mean, think about what it’s picking up. I mean, in the month of June, we did have higher gasoline prices, higher food prices, I know that my cost of living has gone up quite a bit. And so the so we should expect that, but I’m just suggesting is that it sort of like what we have to do as investors and this is one of the things I really, I really have a lot of respect for about the markets is that it’s not just a contemporaneous indicator of what’s going on, but we’re anticipating things to great anticipatory mechanism whether we’re anticipating earnings, economic data, the trajectory of economy Fed policy, the fact that we always get it right but really a probabilistic game. You say when these when these things happen weekly initial jobless claims rise 50% off the lows when the unemployment rate goes up, say half a percent over a three month period or something when you have weakening consumption, see what what these things line up it spells trouble for the economy. And I think that’s what we’re that’s what I’m really suggesting to you it’s not going to happen it’s not today it’s not like looking out the window and saying hey, study outside arrival even comparing this to and I probably stole this from somebody else along the way. Is that a if a person has jumped off a skyscraper and And we’re looking out the window at the 35th sword, we say, hey, that dudes still alive. And but everything’s not okay. And that’s what I really suggesting is that besides that, you know, you’re right, the headlines are going to come out because show a CPI is accelerated once again, I think, right, we have to take that we have to respond to that respect to price action. On the other hand, below the surface, like a subtext of a movie, what is really going on? And see what’s really going on is is right below the surface, and be careful

Nathaniel E. Baker 20:31
how bad things get here? I mean, do you think there’s a recession? If and when we have when it sounds like when is going to be a bad one, like, oh, wait, God help us? Or is it going to be more mild, like, I guess, oh, two are the early 90s.

Marc Chandler 20:49
So I think that, you know, the great financial crisis was a hopefully it’s a once in a generation kind of thing. Now, it seems to me that way, one thing that’s gonna be different about this is this seems to be a typical business more of a typical business cycle, that a financial crisis that’s causing the business cycle to turn. So the turn of the business cycle could cause some economic stress on businesses and ratings, failures. Like you say, having some of these other what’s going on and some of the crypto tech space cause of concern. But the so I would suspect this is going to be more of a garden variety, and of a business downturn with excessive inventories that have to be worn off. And of course, compounded by the pressure from the Federal Reserve, that to get it wrong again.

Nathaniel E. Baker 21:43
What does an investor do here? Because usually, the typical playbook is to go into fixed income, which, you know, you have usually around this time, you would have the Fed loosening. But now, obviously, the Fed is still tightening. Nobody knows exactly how much longer including the Fed, which makes fixed income, maybe not the best idea, again, tell it to the bond market, but and stocks, who knows? They’re I mean, they’re all all over the place. I mean, okay, you can maybe make the case for staples and commodities, maybe I don’t know, but what do you what would you say there to that question?

Marc Chandler 22:15
Yes, I have two ideas for you. Okay. One of them. It sounds kind of like i don’t know i can i can see people’s eyes really cold. I mentioned this to people at parties and things. They just like, How boring. But I’ll tell you that sometimes a boring investment might be a good idea in times when, when it’s sort of like as the old stand up comic said once is that the return of your money is more important than return on your money. And I think this capital preservation is important. What I like, and one of the few things I bought this year for myself, is an eye bond. Now you look up on the internet, you can Google this, what it is, is an inflation linked bond, that the Treasury sells to retail investors. Because the relation link bond is you get a very low yield, but you get the inflation premium. Right now that bonds from the US government pays over 9%. Take a look a bite from the Treasury directly and I direct and inflation linked bond available to retail. There’s some tricks to it though, for example, you’re going as retail investors, you can only put $10,000 for a social security number. So my wife and I have one. Right? And so $10,000 is limited per person per social security number. And but you get an incredible return more than 9% from the US government. Is that tax free, partly tax free, because the federal government Yeah. But also in addition to that, of course, there’s a there’s a I’d say, take a look at this a minor penalty if you sell it early. But in general, I think a risk as as risk free investment is one can think of, I think a bond that the government is underwriting the inflation for you, giving you nine, a little bit more than 9% annualized rate, it gets reset every six months. And this was just resetting me. So you can still get access to it for the next four months at 9%. More than 9%

Nathaniel E. Baker 24:09
What’s the maturity how long you have to hold it?

Marc Chandler 24:11
I, I forget the exact amount of it, but it’s essentially a 15 year bond. And if you sell it, if you start like early, you basically lose the last quarter of interest. So liquid,

Nathaniel E. Baker 24:26
okay

Marc Chandler 24:27
it’s fairly liquid, but you do get a penalty for early liquidation. But when you really think about okay, that, I mean, imagine what could happen. Two or three years from now inflation is back down to two and a half percent. Your yield on that’s fallen and you give up a smaller yield to liquidate to buy to buy a stock or to buy that crypto, we got it whatever, whatever it is, whatever it is you’re avoiding. So I like to add a tie. The other thing I like to it’s on the other end of the risk spectrum. And I think that China has taken a big strides to Rio Dupit and of course, they still have a zero COVID policy. But I could tell you that the stock market has been last month was one of the better performers after being carefully beaten up. So essentially, what I put it like this in the story would be foreigners bailed out of Chinese bonds and stocks in the first part of the year, China was in a horrible lockdown, the economy might contract, you will find this out next week with a GDP report, their economy could have contracted. But that second quarter stuff, most of it took place in April in May, in June, the economy is recovering. We see this with the recent PMIs composites have exploded well back above the 50 expansion. A lot of people don’t have these Chinese stocks anymore. They’re going to be going to begin in Hong Kong, reopening the IPO market. And I think that, you know, China has a very important Congress, by the way, with President Xi is going to get his third term, ostensibly. And in order to the perception, I think that they want to really juice up the economy, make sure it’s on solid footing for this Congress. And I say I could benefit from it. And that’s the only other thing I did this year, besides those I bonds. I bought some Chinese equity ETF in late May, expecting and anticipating this, and I’ve got a decent return. But I still like it. I’m looking to commit more money to it. That is just to say, as a trade idea, not a lifetime marriage, but just buying Chinese stocks with a pullback, and they’ve been beaten up and they should have the kind of recovery we saw in the US in Europe, where you’ve got a new opening, just a jump in activity.

Nathaniel E. Baker 26:39
Is that the FXI? Or the A-shares?

Marc Chandler 26:41
Yep, the FXI.

Nathaniel E. Baker 26:43
Interesting. Okay. Well, those are some Yeah, that’s really on two opposite sides of the risk spectrum for sure. Marc Chandler, thank you so much for joining me contrarian investor podcast today and providing these, this important preview of these economic data as well as these very interesting ideas, which of course are not investment advice. Now, lastly, Mark, where can people find out more about you if they want to read your stuff?

Marc Chandler 27:09
So I have a blog called Marc to market — Marc with a ‘c’, makes my mom happy. I write on there almost every day. And even on the weekend, Saturday and Sunday, Saturday, I post a macro overview Sunday is my my attempt to be a technician looking at that price action. Whenever we do any commentary I try to make it for I really write for my employer. It’s really institutional investors. But my I’ve convinced them that the real source of value in the modern world is not on scarcity. That sort of fake over scarcely what makes my out Microsoft Outlook valuable is I can email anybody in the world. I want my comments to be read by as many people as possible participate in that discussion of the day. And so my boss is allowing me to post my institutional commentary onto my blog freely accessible to anybody who wants it. A lot of times, I’ll also use Twitter I find Twitter is a sort of like that. As far as like for a Boomer for social media. I like Twitter, it’s quick. Of course my stuff is riddled with typos. But I try to do whenever I post something on my blog, I send out a tweet, and also send out tweets on important price action like, like this afternoon, unbeknownst to many people, the Treasurer Secretary what they call the chancellor, and the Health Minister of the UK resigned and took a lot of people by surprise. Sterling had already been beaten up. Soph sent out a tweet about that or when they fed funds switch to pricing in a cut. I send out tweets to sort of short, short little blurbs about what’s going on in the market. I also that I’m at LinkedIn and feel free to reach out happy to help always looking for collaborators and always looking to chat with people.

Nathaniel E. Baker 28:49
Cool it’s Bannock Burn. It’s not it’s not your company, that’s your employer.

Marc Chandler 28:54
If my employer Yes, I tell you the truth I bought into a partnership there. And Bannock Burn was a couple years ago was bought by a bank first financial bank I headquartered in Cincinnati. So I thought I was going to escape working for banks, and they sucked me back in.

Nathaniel E. Baker 29:10
Now there’s a godfather quote about that isn’t there? Cool? All right, Marc Chandler. So that’s Marc to market MarcToMarket.com. Yeah, I’ve actually read I read I read your stuff on Seeking Alpha usually. Because I know publishers there as well. And yeah, a great resource for people to check out. It’s really a great summary of of what’s going on macro wise, and there’s a lot of it like every day, so people can read that. Awesome. Again, thank you so much Marc, for joining the podcast. Thank you all for listening. And with that we look forward to speaking to you again next time.