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

It’s job Friday. The release of the monthly U.S. nonfarm payrolls report is always a high point for Wall Street, especially in an uncertain monetary policy environment when traders are hypersensitive to factors impacting Reserve thinking. federal.

Indeed, the resilience of the labor market leads many market observers to argue that despite two successive quarters of contraction, the US economy is not really in a “true” recession.

These Holocaust deniers are wrong, says Dhaval Joshi, chief counterpoint strategist of BCA Research in his latest note. This is a recession, albeit in reverse! Why? Because real labor costs are falling.

Companies lay off staff when they need to protect their profits, he explains. In the past, when nominal sales fell relative to wage rates, unemployment always rose.

But during a recession in which nominal sales do not decline relative to wage rates, profits remain resilient and therefore companies do not need to cut labor costs. It is happening now.

“In the topsy-turvy recession of 2022, inflation in consumer prices and nominal sales was much higher than that in nominal wage rates. The result is that real wage rates have crashed, profits have remained resilient, and companies have had no need to lay off workers…until now,” says Joshi.

Source: BCA Research

Therefore, this recession is fairer, Joshi believes.

“In a typical recession, the pain falls on the minority of workers who lose their jobs, as well as on profits. Paradoxically, for the majority who keep their jobs, real wages increase. Indeed, persistent wage inflation tends to resist more than the collapse of price inflation.

Yet in the current downturn, the real wage rate has fallen by 4% “meaning that the pain of the recession has befallen us all… This is borne out by the current malaise characterized not as a” jobs crisis”, but as a ‘cost of living crisis’.

So what happens next? Monitor consumer price inflation and business sales. Once corporate revenue growth begins to fall below more rigid wage growth, profits will decline and executives will seek to cut staff.

“If inflation comes down slowly, the current ‘cost of living crisis’, which is weighing on everyone’s real income, will persist. But if inflation falls rapidly while wage inflation remains sticky, companies will be forced to lay off workers to protect profits, turning the ‘cost of living crisis’ into a ‘jobs crisis’. , says Joshi.

And what are the conclusions for investors? Well, in either scenario, consumer spending, especially on goods, will be crimped. Housing investment will remain in contraction until mortgage rates come down significantly.

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

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


Stock markets are generally calm as traders await US payroll data. S&P 500 ES00 futures contracts,
are up just 0.1% at 4,157 and Nasdaq 100 NQ00 futures,
add 0.1% to 13,330. Meanwhile, the DXY Dollar Index,
is up 0.3% at 105.96 and the 10-year US Treasury yield TMUBMUSD10Y,
is down less than 1 basis point at 2.696%. crude oil WTI CL.1,
is up 0.6% at $89.08 a barrel, GC00 gold,
is down 0.2% at $1,802 per ounce and Bitcoin BTCUSD,
rose 2.8% to $23,149.

The buzz

The focus on Friday is on the latest US nonfarm payrolls data. Economists forecast that 250,000 jobs were added in July, compared to 372,000 the previous month and that average income growth remained stable at 0.3%.

You only have one chance to make a first impression. Record a failure, then, for Warner Bros. Discovery WBD,
whose shares are down 10.6% before the opening bell after missing revenue expectations of about $2 billion in its first earnings update Thursday night.

shareholders have agreed to another stock split – the shares, very reasonably, go “meh”! Meanwhile, Elon Musk counter-sued Twitter TWTR,
as the final chapter of “Billionaire Buyer Remorse” unfolds.

Shares in AMC Entertainment AMC darling meme-stock,
are down 8.6% in premarket trading after the group announced it would issue a special dividend in the form of ‘Ape’ preferred stock.

A quieter day for revenue includes Western Digital WDC,
and DraftKings DKNG,

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

Source: Refinitiv

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