Payrolls Turn Negative Next Quarter And Stay There For All 2023: BofA
After Friday’s payrolls report once again surprised to the upside, while the unemployment rate unexpectedly slumped near all time lows as the number of unemployed workers dropped sharply in September, sparking a swoon in the S&P on 6 of the past 7 payroll Fridays, Bank of America’s economists summarized the payrolls data noting that there was “little in our BofA Indicator of US Labor Market Conditions and BofA Indicator of US Labor Market Momentum that suggests current and expected Fed tightening have significantly dented the strength of labor markets.” They go on to note that while conditions have moderated somewhat, they remain near all-time highs, and “those that were expecting the Fed to pivot to a slower pace of rate hikes in November may very well be disappointed on the heels of today’s report.”
But it’s not all good news: momentum – which is the marginal rate of change in labor market conditions – has softened somewhat over the past year, likely reflecting some of the unusual nature of labor market performance during the pandemic. In other words, the BofA framework would normally interpret slower payroll employment and stronger wage growth as late-cycle developments, whereas in the current context they could simply characterize a labor market emerging from the pandemic. The bank’s economists conclude that “notwithstanding this signal extraction problem, we are inclined to take the framework at face value; though recent employment reports would be viewed as robust by any historical standard, they are still less robust than some employment reports received in 2020 and 2021.”
A far more ominous take on the NFP report was provided courtesy of BofA credit strategist Yuri Seliger who wrote that while the September Payrolls report was strong, “we should start seeing a slowdown in jobs soon.”
And unlike other banks who still pretend the US can magically avoid a recession with 7% mortgages, record credit card rates and near record low savings rates, the BofA strategist (whose employer recently forecast a recession as a base case) actually put his money where his mouth is and wrote that the bank’s economists are calling for Payrolls to drop to about half the pace in 4Q vs 3Q and then go negative in 1Q-2023, where they will stay until the end of the year.
This is because financial conditions are tightening fast. Here, BofA economists estimate conditions are already much tighter than at the peak of the prior cycle in 2018.
Meanwhile, as we discussed earlier, the interest-rate sensitive part of the economy – housing…
… and autos…
… are both showing clear signs of slowing. On the IG credit side the industrial corporate index notional is already shrinking ex. rising stars for the first time since 2005
In conclusion, Seliger looks ahead and muses that how much growth slows in 2023 will “ultimately determine the impact on credit fundamentals. A stronger than expected US economy now, and the resulting more rapid Fed tightening cycle, create more downside risk to growth in 2023.” The good news for credit investors is that the coming recession matters less for IG spreads, because as long as it is shallow, the impact on IG credit fundamentals is limited. That’s because companies have already been conservative with their balance sheets, with no increases in gross debt in each of the past six quarters. On the other hand GDP growth remaining positive in nominal terms should support earnings, but should growth continue to shrink then after two quarter of dodging the bullet, corporate profits will finally be hit some time in Q4, sparking the long-overdue retail capitulation that Goldman said is finally starting.
Sun, 10/09/2022 – 22:00