It’s an “upside down” recession and that’s what it means for the market

It’s Friday jobs. The release of the monthly US Non-Farm Payrolls report is always a highlight on Wall Street – especially in an uncertain monetary policy environment, when traders are highly sensitive to factors influencing the Fed’s thinking.

In fact, a flexible labor market is causing many market watchers to argue that despite suffering two straight quarters of downturns, the US economy is not actually in a “proper” recession.

Daval Joshi, chief strategist at BCA Research’s Counterpoint, argues in his latest note that these recession deniers are wrong. He. She he is Stagnation, albeit “upside down”! why? Because real labor costs are declining.

It shows that companies lay off employees when they need to protect profits. In the past, when nominal sales fell relative to wage rates, unemployment always rose.

But during a recession when nominal sales are not declining relative to wage rates, profits remain elastic and hence firms do not need to reduce labor costs. This is happening now.

“In the recession of 2022, there was much more inflation in consumer prices and nominal sales than in nominal wage rates. The result is that real wage rates have collapsed, profits have been holding up, and companies have not had to lay off workers… yet, he says. Joshi.

Source: BCA Research

Thus, this stagnation is fairer, Joshi believes.

In typical downturns, the pain falls on the minority of workers who lose their jobs, as well as on earnings. Ironically, for the majority who keep their jobs, real wages are rising. This is because constant wage inflation tends to hold out more than the collapse of price inflation.”

However, in the current downturn the real wage rate has fallen by 4% “which means that the pain of the recession has hit us all… This is confirmed by the current malaise which is not described as a ‘jobs crisis’, but rather a ‘work crisis’. cost of living.”

So, what will happen next? Monitor consumer price inflation and company sales. Once corporate revenue growth begins to fall below steadier wage growth, profits will decline and managers will look to downsize the workforce.

“If inflation falls slowly, the current ‘cost of living crisis’, which is undermining everyone’s real income, will continue. But if inflation falls rapidly while wage inflation remains constant, companies will be forced to lay off workers to protect their profits, turning the ‘cost of living crisis’ into a ‘crisis’. Jobs,” says Joshi.

And what are the conclusions for investors? Well, in either scenario, consumer spending, especially on goods, will be curtailed. Housing investment will continue to contract until mortgage rates drop significantly.

“This double stranglehold on growth is likely to rein in ultra-long bond yields, even if central banks need to raise short-term rates more than expected to kill inflation,” Joshi says.

“For the stock market, this suggests that the valuation bear market is now over, but the ‘cyclical value’ sectors are now vulnerable to dividend cuts. Hence, equity investors should stick to ‘defensive growth,’ specifically healthcare and biotech,” he concludes. .


Stock markets have generally improved as traders await US payroll data. S&P 500 ES00 index futures,
+ 0.14%
It rose just 0.1% to 4,157 and Nasdaq 100 futures NQ00,
+ 0.05%
They add 0.1% to 13330. Meanwhile, the DXY Dollar Index,
+ 0.17%
It rose 0.3% to 105.96 and the 10-year US Treasury yield TMUBMUSD10Y,
It fell less than one basis point to 2.696%. WTI CL.1 Oil,
It rose 0.6% to $89.08 a barrel, gold GC00,
It fell 0.2% to $1,802 an ounce and Bitcoin BTCUSD,
+ 3.82%
It advances 2.8% to $23,149.


The main focus for Friday is the latest US non-farm payrolls data. Economists expect 250K jobs added in July, down from 372K in the previous month and average earnings growth steady at 0.3%.

You only have one chance to make a first impression. A failure record, then, for Warner Bros. Discovery WBD,
+ 4.61%And the
whose shares fell 10.6% before the opening bell after it missed revenue forecasts by about $2 billion in its first earnings update late Thursday.

Tesla TSLA,
+ 0.40%
Shareholders agreed to another division of shares – shares, quite sensibly, go to “meh”! Meanwhile, Elon Musk filed a lawsuit against Twitter TWTR,
+ 0.15%
The final chapter of “The Billionaire’s Regret on Jupiter” also appears.

Share in the meme-stock darling AMC Entertainment AMC,
+ 2.47%
It fell 8.6% in pre-market trading after the group said it would issue a special dividend in the form of “Ape” preferred stock.

A quieter earnings day includes Western Digital WDC,
+ 1.05%
and DraftKings DKNG,

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More than 80% of S&P 500 companies have now reported second-quarter earnings season, and so far earnings are up 8.6%, on a mixed basis according to Refinitiv. Energy was an important contributor. The oil price averaged well above $100 per barrel for the month of April through June. But it’s now under $90.

Source: Refinitiv

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