5/1/25 Charts & Ideas: What Markets Are Telling Us

05/02/2025 | Unsubscribe

Good Morning!

Here are some important charts and ideas capturing the latest trends in US markets to help you understand what is happening from multiple different perspectives:

🔍 Key Insights from the ADP Jobs Report

• 📉 Job growth slowed sharply: Only +62k jobs added, well below expectations and the slowest since July 2024.

• 📊 Hiring is cooling: Sectors like education/health (-23k) and information continue to shed jobs; leisure/hospitality and TTU are still growing.

• 🧭 Wage growth is slowing: Pay for workers staying in jobs is barely above 4%, aligning with Fed targets for inflation moderation.

• ⚖️ Hiring caution: Employers appear uncertain, likely due to policy shifts (e.g., tariffs) and signs of a normalizing labor market.

• 🏭 Mid-sized companies (50–499 employees) drive job growth — small firms are pulling back.

• 📍 Regional weakness: New England and the West South Central regions show the most job losses.

💼 What This Could Mean for You

• 🟡 Slower economic momentum: A cooling labor market may dampen consumer spending, affecting earnings in consumer-facing stocks.

• 📉 Potential downside for stocks if job trend continues to be lower, especially in rate-sensitive and white-collar sectors (tech, consumer discretionary).

• 🏦 Fed may delay rate cuts: Despite weaker hiring, sticky inflation (core PCE at 3.5%) keeps the Fed cautious.

• 🔄 Invest defensively: Consider exposure to stable sectors like utilities, consumer staples, or dividend-paying stocks as uncertainty rises.

• 💸 Wage disinflation = lower inflation pressure, which is suitable for long-duration assets like bonds to go up in price (lower yield).

🔁 Alternative Perspectives to Consider

• 🟢 Not a recession yet: Job growth remains positive, and cyclical hiring (construction, transport) remains intact.

• 🟠 Fed “cover” for later cuts: If job growth keeps slipping, the Fed may eventually pivot more dovishly— positive for bonds and growth stocks.

• 🔁 Data lag: ADP often diverges from the official BLS report. The NFP could still surprise positively.

🔍 Key Economic Signals

• 📉 Wage growth is below interest rates:

  • Private wages rose just 3.3% YoY in Q1 2025.

  • The Fed Funds Rate is above this level — a historically negative signal for economic momentum.

  • Past occurrences (e.g. pre-2001, pre-2008) saw recessions follow when rates > wage growth.

• 🏦 Disposable income is growing slowly:

  • Real disposable income: +1.5% YoY

  • Real consumption: +3.1% YoY (meaning people are spending more than their income is growing)

• 💸 The savings rate is low but starting to rise:

  • Consumers are beginning to pull back, likely due to credit stress, inflation, or job market uncertainty.

💼 What This Could Mean for You

• 🛍️ Consumer spending may weaken: Slower wage growth + softening real income = pressure on retail, travel, and discretionary sectors.

• 📉 Earnings headwinds ahead: Companies may struggle to maintain profit growth as wage-driven consumption fades.

• 🧱 Recession risk rising: The wage-rate inversion and lagging income are classic late-cycle signals.

• 💼 Defensive strategy suggested: Prioritize low-debt companies, dividend payers, or essential sectors (utilities, healthcare).

• 🏦 Fed won't ease quickly: Core inflation remains sticky, so don't expect rapid rate cuts even as income growth slows.

🔁 Alternative Perspectives to Consider

• 🟢 Consumer resilience (for now): Despite lower income growth, consumption is still outpacing, thanks to jobs, credit, and post-COVID savings buffers.

• 🟠 Normalization vs crisis: This may reflect a return to pre-2020 norms rather than an imminent downturn.

• 🔄 Higher-for-longer may work: If wage growth stabilizes around 3–4% and inflation cools further, it could support a soft landing.

🔍 Key Insights from the Chart

• 🟪 Post-"Liberation Day" twist steepener:

  • 2-year yields fell, reflecting expectations of Fed rate cuts or weaker short-term growth.

  • 10-year yields rose, signaling long-term inflation concerns or increased fiscal risk.

  • This is known as a “twist steepener” — a rare curve steepening with conflicting signals.

• 📉 SPX weakness followed: The S&P 500 declined after this twist emerged, suggesting investor confusion or concern over macro signals.

• 🧩 Mixed interpretation:

  • A typical bull steepener (falling short rates) would be bullish for equities.

  • A bear steepener (rising long rates) often implies bond market stress or inflation fears — bearish for risk assets if the rise is excessive and greater than economic growth.

💼 What This Could Mean for You

• ⚠️ Market is sending mixed signals: Be cautious with aggressive equity exposure. This setup reflects uncertainty, not conviction.

• 🏦 Stay diversified: Don’t over-tilt toward either rate-sensitive growth stocks or deep-value names until their is more clarity.

• 📈 Long bonds at risk: Rising 10-year yields suggest duration risk; consider reducing exposure to long-term Treasuries or bond funds, depending on your time horizon.

• 🧠 Macro volatility ahead: These curve shifts often precede policy changes, credit events, or global dislocations — hedge accordingly.

🔁 Alternative Perspectives to Consider

• 🟢 Fed pivot optimism: Falling 2-year yields may reflect hopes of easing, not just economic weakness.

• 🟠 Inflation risk returning: The 10-year climb could be pricing in a second inflation wave, shifting Fed expectations again.

• 🔄 Curve noise vs signal: Sometimes, yield curve steepeners result more from positioning and technicals than fundamental economic shifts.

🔍 Key Takeaways from the Chart

• 📈 The term premium is rising:

  • The ACM 10-year term premium has climbed sharply since mid-2024.

  • This premium reflects uncertainty about inflation, debt supply, and long-term Fed credibility.

• 📉 Market expects rate cuts and weaker growth:

  • The "pure rate expectation" (bond yield minus term premium) has dropped significantly, indicating traders see an economic slowdown ahead.

• ⛔ But yields haven’t fallen:

  • Without the rise in term premium, the 10-year Treasury yield would likely be ~3.6%, not the current higher level.

  • The term premium is essentially “propping up” yields.

💼 What This Could Mean for You

• ⚖️ Bond risk is elevated: Long-term Treasury yields remain high despite expected rate cuts, making bond prices vulnerable to term premium volatility.

• 🧭 Don't chase duration: Now may not be the time to go all-in on long bonds — shorter durations or barbell strategies offer more balanced exposure.

• 📉 Stock valuations may face pressure: Higher yields (driven by premium, not growth) can weigh on P/E multiples, especially for tech/growth stocks.

• 🔄 Term premium reflects fiscal concerns: If the premium keeps rising, it may signal worries about U.S. debt, inflation anchoring, or global trust in Treasuries.

🔁 Alternative Perspectives to Consider

• 🟢 Premium could reverse: If inflation cools further or Treasury issuance slows, the term premium could decline sharply, pushing bond yields down.

• 🟠 Still room for bond gains: Even with elevated premiums, if the Fed cuts aggressively or recession hits, yields may still drop, benefiting bondholders.

• 🔄 Volatility = opportunity: Active bond strategies (e.g., curve trades, relative value) may outperform passive exposure in this environment.

That’s it for today!

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Best Regards,

Ultimate Alerts Team

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