As we discussed in my Thursday note, the productivity data continue to reflect a productivity boom.

This comes from a tight labor market, as employees are doing more with less, and employers have been forced to innovate/adopt new technologies.  Add to this, we are in the first inning of generative AI, which might be the most productivity enhancing technological advancement of our lifetime.

With that, as we also discussed in my last note, high productivity growth is a driver of long-term potential economic growth. 

Powell gave a speech on it in 2016.  Bernanke, when he was Fed Chair, constantly blamed weak productivity growth as holding back the post-GFC economy.  Yellen did too, during her term, also attributing weak productivity growth to weak wage growth.

Now, here we are, getting the hottest productivity gains since 2007 (excluding the skewed pandemic data).  The Fed should be very pleased.  

But it seems the current Fed Chair, Jerome Powell, is now disinterested.  He barely utters the words.  In fact, scanning back through all of the post-FOMC press conferences this year, he has uttered the word “productivity” a whopping four times.

Why so apathetic?  After all, high productivity growth contributes to economic growth, without stoking inflation.  Remember, the annual growth in the cost per unit of output last quarter was negative!  Productivity gains more than offset wage gains. 

What does it mean? 

It means the Fed should be encouraging dramatic wage gains, to close the gap with the rise in the level of prices over the past three years (to restore living standards).

As Powell has said in the past, wage gains should equal productivity gains plus inflation. 

With that, wages should be growing at double the current 4.2% year-over-year rate.

This is all a formula to recalibrate (higher) the “growth potential” of the economy.  The Fed knows it (well documented through past presentations), yet has in its own projections a long-run economic growth outlook of just 1.8% (the so called “new normal” low growth).

Perhaps this perception manipulation is why the economist and Wall Street forecasts have embarrassingly and dramatically undershot on actual economic growth — and why they continue to chatter about a “slowing economy” if not one teetering toward recession.

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Remember, we are in the early days of what may be the most productivity enhancing technological advancement of our lifetime, in generative AI.

On that note, Q3 productivity data was reported this morning.  And it was big, at 4.7%.  That follows productivity gains of 3.7% (annual rate) in the second quarter.  For perspective, we averaged less than 1% productivity growth for the decade prior to the pandemic.  

These hot productivity gains create the opportunity for the continuation of much needed wage gains (to restore living standards, which have been eroded by inflation). 

On that note, despite some of the hottest wage gains we’ve seen in decades, the annual growth in the cost per unit of output last quarter was actually negative (-0.8%).  This means wage growth is more than being offset by productivity gains. 

That means increasing wages are not a problem in the inflation picture.  And Jerome Powell admitted as much yesterday. 

So, we’re in the early stages of a productivity boom.  That’s great news.  And guess who presented on the importance of productivity growth as a driver of the long-term potential growth rate of the U.S. economy?  Jerome Powell did, back in 2016 (here).

This all supports the path of both economic growth (hot) and inflation (falling).

With the above in mind, we‘ve talked about the reversal signals in the bond market.  With the Fed meeting now behind us, and the increasing likelihood that the next change will be in the direction of interest rate policy, yields continued to slide today.

As we discussed yesterday, the economy continues to run hot, well above trend growth.

Q3 GDP came in this morning at an annual rate of 4.9%.

Meanwhile the tech stocks continue to put up big numbers, yet are all being sold.

Google did record revenues on double-digit growth, with 46% EPS growth (yoy).

Microsoft grew revenue by 13% and EPS by 27%.

Meta/Facebook did 27% revenue growth on record revenue, more than doubled operating income, and did 2.6 times the eps of a year ago.

And Amazon reported today after the close.  They had 14% revenue growth and 3x’d the EPS of a year ago.

In listening to these earnings calls, you would have a hard time trying to find something to be disappointed about with what’s going on in these companies.

They are all reorienting their businesses around AI.  The Google CEO calls AI a “foundational platform shift.”  Zuckerberg (Meta CEO) says they are de-prioritizing non-AI projects and shifting to AI.

It’s a new growth and margin expanding catalyst for these companies, which already have sustained high margins and double-digit growth.  So, what’s coming?  Expanding margins and higher growth.

Plus, this AI technology revolution only widens the (already very wide) competitive moats of big tech.

With that, what’s prompting the selling in these stocks?

Is it forced selling, related to the war drums (i.e. foreign investment exiting in fear of future sanctions)?  Maybe.

Maybe it’s something bigger:  The oligopoly in tech has only gotten to this point of power consolidation because the government has turned a blind eye to antitrust law.

Now we have the Biden FTC threatening to breakup Amazon.  We’ve had plenty of empty threats from Capitol Hill and the DC bureaucrats about breaking up the big tech monopolies through the years, only to allow them to multiply in size and strength.

Is it for real this time?

Once again, both calls were dominated by the discussion on AI.

Remember, we are just in the early days of maybe the most productivity enhancing technological advancement of our lifetime:  generative AI. 

In my Thursday note, we talked about the technical reversal signal in the bond market, specifically the yield on the 2-year government bond (futures contract).

That 2-year yield is now 20 basis points lower from Thursday’s highs.

Add to this, today we had a similar signal on the benchmark 10-year yield.

After taking a peek ABOVE the important 5% level early this morning, yields reversed sharply to settle on the lows of the day, around 4.85%. 

As you can see in the chart below, similar to Thursday’s action in the 2-year, today the 10-year put in a technical reversal signal (an outside day).  

Now, this reversal gained momentum when a large hedge fund manager (Bill Ackman) announced on Twitter that he had covered his short bond position.  Ackman thinks a slowing economy and “too much risk,” given the events in the Middle East, will bring demand back into the Treasury market.

On the latter (“too much risk”), global capital tends to flow IN to U.S. Treasuries in times of heightened geopolitical risk, which sends bond prices up/yields down.

That said, global capital also tends to flow IN to the dollar and gold in times of stress.  But both of those markets were down on the day.

Maybe today’s move in yields was more about what happened last Thursday and what’s coming on Friday, and less about what’s happening on the war front.

Remember, last Thursday, we heard from the Fed Chair, Jerome Powell.  He told us financial conditions had “tightened significantly” since the September meeting, and that has been driven by the move in long-term bond yields.  Translation:  If the Fed needed to do more, the market has done it for them (and maybe too much).

On Friday, we’ll get September core PCE.  The Fed’s favored inflation gauge is expected to continue its steady decline, falling to a 3.7% year-over-year change.  And the six-month average monthly change in core PCE has us on path to sub-3% by March of next year.

This is data that should be welcomed by the Fed and markets.

With all of the above in mind, remember last week we talked about the set up for bonds (“bonds are a buy”).  Two of the most liquid bond ETFs, the corporate bond ETF (symbol LQD) and the government bond ETF (symbol TLT), had bullish reversal signals today.