Hi friends,

Today, we are going to do a quick preview of the macro catalysts this week, as well as the stock market seasonality analysis for July.

Ahead of writing this article, I just recorded a YouTube video today’s topics. If you find my content useful, please like, share, and subscribe :-)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

1. Powell speaks on Tuesday

Powell is set to speak on Tuesday morning.

In the June FOMC, Powell was encouraged by the CPI print on the same day, but asserted that the Fed needs to see more positive data.

Because the Q1 inflation was so worrying, I interpret “more” as at least 3 benign prints from CPI and PCE, before the Fed considers the first cut.

Powell does not see a weakening in the labour market to warrant the loosening of policy. 4% unemployment is still “historically low”, and not something the Fed worries about at all.

Finally, 1 cut vs 2 cuts in 2024 is a very close call for the Fed. If we only get 1 cut this year (i.e. in December), the Fed likely just adds an extra cut to the 2025 projection. This implies that delaying the rate cut is a timing shift, not a magnitude shift.

2. Nonfarm Payrolls on Friday

While inflation is at the front and centre of the Fed’s rate-cut decision, nonfarm payrolls are important for two reasons:

1) Maximum employment is still part of the Fed’s dual mandates. This is defined as “if you want a job, you can get one”. A sharp spike in unemployment rate is still undesirable, especially if inflation remains sticky.

2) Average Hourly Earnings have a direct association with inflation. We can see from the chart below that the higher hourly earnings lead to higher CPI and vice versa. This is because employers can pass some of the wage gains onto their products and services, driving up prices.

This may be slowing down today as consumers start to trade down to cheaper products, limiting the ability of the businesses to hike pricing.

Is it possible to predict the Nonfarm Payrolls?

In short, with great difficulty.

In terms of the headline NFP numbers (i.e. the net jobs added / lost), there isn’t a direct correlation between them and inflation. The Fed knows this, because for the past two years, inflation has been coming down, but the labour market has stayed strong due to a structural supply-demand gap.

While there has been a moderate negative correlation between NPF and average monthly initial claims, the relationship is somewhat broken lately. I suspect this is due to the strong employment among immigrant workers, who make up nearly 20% of the workforce. NFP is also an employer-side data (“Establishment”) data that can potentially double count people with two jobs.

3. July seasonally positive for stocks

The first 15 days of July tend to be very rewarding for equity owners.

Below are the July seasonal patterns on a day-to-day basis for both SPY and QQQ. While stocks have been on a tear, they may be able to keep their momentum until mid-July.

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