Under employment flashes red while hedge funds bet big

• NFP disappoints – seals a September rate cut, or does it?
• CPI and PPI data this week – what will that show?
• Bonds rallied hard on the week, Gold teases new high.
• Oil loses ground, OPEC + confirms production increase.
• Try the Rigatoni.

On Friday, stocks gave back some of Thursday’s gains after the 8:30 am NFP report came in much weaker than expected — just 22k new jobs vs. the already soft 78k expected. The release sparked confusion from the moment it hit the tape, sending markets on a rollercoaster: up, then down, then up again, before ultimately ending the day lower as analysts and economists debated the Fed’s next move.

The Dow lost 220 pts, the S&P gave back 21 pts, the Nasdaq managed to hold onto most of the gains only losing 7 pts, the Russell caught a bid at the end of the day and added 11 pts (think lower rates), the Transports lost 44, the Equal Weight S&P added 5 pts while the Mag 7 gave up 81 pts.

The report showed a loss of 12k manufacturing jobs, a two-month payroll net revision of -21k, Avg Hourly earnings y/y up 3.7% vs. the expected 3.8% and down from last month’s read of 3.9%. Unemployment ticked up to 4.3% (up 0.1%) which was expected while the Underemployment rate* shot up to 8.1% (up 0.3%).

Wait! What’s the Underemployment Rate?

The underemployment rate (U6) measures the percentage of workers who have a job but not the job they want. It includes those stuck working part-time for economic reasons (can’t find full-time work) or those in roles that underutilize their skills, education, or experience.

It’s broader than the standard unemployment rate (U-3), which only counts those actively looking for work but not employed. So why is this the canary in the coal mine?

Because underemployment tends to rise before unemployment does. Employers often cut hours or downgrade roles before moving to outright layoffs — making U6 an early signal of economic weakness. Note the move last month….0.1% vs. 0.3% higher.

Today, the unemployment rate (U-3) stands at 4.3%, but underemployment (U6) is sitting at 8.1%. That gap suggests the economy may be weaker than the headline number implies. In January the U-3 was 4.1% while the U-6 was 7.5%, today it is 4.3% vs. 8.1%.

Why it matters:

Underemployed workers earn less, which hits disposable income, it erodes worker confidence and increases financial strain. Skills go underutilized, and overall economic output suffers. In the end - a rising underemployment rate is often the first warning sign that the economy is slowing, even if the unemployment rate hasn’t caught up yet.

The weak print all but sealed a September rate cut — the only question now is whether it will be 25 bps or 50 bps. And if September is in play, then what happens at the October and December meetings? Fed Fund futures are now pricing in a total of 75 bps in cuts, delivered in three waves of 25 bps each.

But before the Fed makes that call, the market will have to digest this week’s inflation data:

PPI (Producer Price Index): expected to be tame at +0.3% m/m, +3.3% y/y on the headline, and +0.3% m/m, +3.5% y/y ex-food and energy.

CPI (Consumer Price Index): expected to rise +0.3% m/m and 2.9% y/y — a tick higher than last month on the headline and +0.3% m/m and + 3.1% y/y ex food and energy.

If the inflation data matches expectations, then a rate cut in September is almost assured. But if inflation comes in hotter than expected, the Fed faces a real dilemma: Cutting rates into rising inflation - risks fueling more inflation while undermining their credibility. Holding steady risks worsening the slowdown in an already fragile labor market. But let’s be clear – while the labor market is softening, the economic data remains fairly strong. I mean, it’s not like we are circling the drain.

It’s the classic Fed conundrum — fight inflation or support growth — and Friday’s jobs data makes that choice even tougher. The consensus seems to be (at this moment) that the FED will cut by 25 bps…Stay glued to your seats, this week is sure to be interesting.

Now here is something else to consider – the Hedge Fund community is at it again….They are betting that the market is about to crack…..short positioning in the S&P futures contract jumped to $180 billion….That’s $10 billion more than the record set in January…..These guys are betting on the fact that valuations are stretched (something we have been discussing), that inflation remains a problem (something else we have been discussing) and that FOMC committee is confused on what to do (and we discussed this as well).

Now to be clear – they ARE hedge funds – they are supposed to ‘hedge their bets’ so while this is not necessarily an issue, the size of the bets does suggest volatility ahead – again something we have been discussing for a while now.

In the end it is September (how long have we been discussing that?). If the market weakens, volatility will spike and it will be the ‘sexy’ outperforming names that take it on the chin…Think Tech, AI, Communications – which does NOT mean the broader market won’t go lower as well, it will but the game is not over, it just means that a sale is coming. Sales equal opportunities, and who doesn’t love a sale?

Of the 11 S&P sectors – 4 of the 11 lost ground – Industrials – XLI – 0.4%, Utilities – XLU – 0.3%, Financials – XLF – 1.8%, and Energy XLE – 2%. We saw strength in Communications – XLC + 0.5%, Healthcare XLV + 0.35%, Basic Materials – XLB + 0.7% and Real Estate – XLRE + 1%.

We also saw strength in the Homebuilders – XHB rallied 1.8%, Retailers – XRT + 0.5%, Airlines – JETS + 0.6%, Metals & Miners – XME + 2.9%, Semi’s – SOXX + 1.2%, Aerospace & Defense – XAR + 0.6%.

Bonds loved the weaker jobs news. The TLT and TLH gained 1.5% and 1.2% on Friday, capping the week with advances of +3.5% and +2.6% respectively. The AGG (iShares bond ETF, which includes both Treasuries and corporates) also rose 1.4%. YTD – the TLT is up 1.4%, the TLH + 3% while the AGG is up 3.3%.

Yields dropped sharply: the 10-year closed at 4.08%, down from 4.3%, while the 30-year fell to 4.75%, down from just under 5%.

The big question now: does the 10-year retest the April lows at 3.75%? The chart suggests it could — we’ve already broken through the March and May lows at 4.10%, which leaves April’s 3.75% as the next downside target. Whether we get there will depend on what this week’s economic data tells us.

Oil continued to slide, losing 2.4% (about $1.50/barrel) to end the day at $61.87 on two narratives: first, on the idea that the economy is weakening (I’m not in that camp), and second, on the idea that OPEC+ is raising production.

Now, what started last week as chatter, then turned into speculation, finally became official over the weekend: OPEC+ confirmed they will boost output in October by an additional 137k barrels per day.

So now what? Oil is down 7.7% since August 1^st…. The chart shows that we are teasing the June/August lows, we are below all 3 trendlines – the move a result of the ‘rumor’ of increased production along with the expectation of a weaker economy.

Where we go next – will depend on the data we get this week…. I wouldn’t be surprised if we actually saw oil rally – in a ‘sell the rumor/buy the news reaction. And in fact – oil is UP 1.6% at $62.85.

Remember a supply glut created by increased production does not mean demand has declined – it just means that there is more supply which should not be viewed as a negative, in fact it would be a positive if it drives the price of gasoline lower over time. (think better for the consumer and better for business).

Gold surged $40 on Friday, closing on the highs as investors piled in on the themes of U.S. rate cuts, Fed independence, and global instability. Beyond the classic “safety trade,” we’re also seeing relentless central bank buying — China just reported an increase in gold reserves for the 10th straight month as they continue to diversify away from the U.S. dollar.

Gold is now up 30% this year, on top of 25% last year. On August 29th, it broke out above the old top near $3,450 and has since surged to new highs. And as we know, new highs tend to beget new highs. And with that – our friends at Goldman slapped a $5,000 price target on gold. If that’s not a signal, I don’t know what is!

At the same time, the RSI (Relative Strength Index) on gold is sitting well into overbought territory at 76.519 (70 is the dividing line). That doesn’t mean gold collapses tomorrow, but it does suggest a period of consolidation — or even a pullback — is more likely before the next leg higher. Just a thought.

US futures are higher ahead of this week’s inflation data – suggesting that the market is not expecting inflation to spin out of control. At 3:30 am Dow futures are +63, S&P’s up 13, Nasdaq up 90 while the Russell is up 3.

European markets are looking to open mostly higher – News that France is about to lose their Prime Minister Francois Bayrou to a no-confidence vote over $51 billion worth of budget cuts to the French budget are driving this vote. Bayrou is the 4^th Prime Minister to serve France in just the last 2 years. Other than that, there are not macro data releases across the zone today.

The S&P closed on its high at 6481 down 20 pts….Recall that on Friday morning we discussed how the S&P closed at a new high of 6508 and that that suggested it will try to push higher on Friday – well it did, it traded up to 6532 before failing and so now we have yet another new intra-day high to test. While the action this morning suggests a positive move – I do not think we test it today.

Rigatoni with eggplant and cherry tomatoes in basil cream

Simple and delish.

For this you need: Rigatoni, Cherry Tomatoes – sliced in half, Eggplant cut into bite sized cubes, Fresh Basil, Cream Cheese, s&p, Olive oil, Oregano and Ricotta Salata.

Begin by heating up your oven to 350 degrees and bringing a pot of salted water to a rolling boil.

Place the cubed eggplant, and the tomatoes in a Pyrex baking dish. Season with s&p and oregano. Add a splash of olive oil and place in the oven for 30 – 40 mins.

Next – in a food processor – add the fresh basil, cream cheese, s&p, olive oil and a splash of water. Blend until it becomes a rich creamy sauce.

When the eggplant is almost done, add the pasta to the water and cook until aldente – 8 – 10 mins max.

Remove the eggplant from the oven – add in some torn basil leave and grated Ricotta Salata. Toss.

Now add in the strained pasta and toss. Add in the basil cream and a bit of the pasta water to help moisten. Toss to coat and serve in warm bowls.