A month ago, the decline in “job openings” data (JOLTS) kicked off a week-long series of softer employment data.

It’s no secret that the Fed has been targeting/threatening jobs along the way, over the past eighteen months, in its inflation fight. 

And Jerome Powell has specifically isolated this JOLTS data.  He thinks a high supply of jobs leads to people quitting jobs at a higher rate, which leads to job seekers leveraging their position of strength to get a higher wage.

And higher wages, the Fed has feared, will lead to more inflation, and self-reinforcing inflation pressure.

So, a softer job market is considered good news in this world, as it suggests the Fed may finally relent and bring an end to the tightening cycle madness. 

Indeed, it was good enough (combined with favorable data of the past few months) to put the Fed on hold last month.

That brings us to today’s data:  This morning we kicked off the same series of jobs data with the most recent JOLTS report.  It was higher — a negative surprise.

This pushed yields to new sixteen-year highs, again.  Stocks went lower.  The dollar went higher.

And it triggered what looks like intervention (yet to be officially confirmed).

As we’ve discussed, this level in the benchmark U.S. market interest rate puts high stress on the domestic and global economy.

And the step higher, by the day, in U.S government bond yields, continues to stress markets that are already at vulnerable levels.

We’ve talked about the 150 level in USD/JPY, as the level of yen weakness that proved to be intolerant to the Bank of Japan last October.

The wider the spread between U.S. rates and Japanese rates, the more upward pressure on the value of the dollar vs. the yen.

They intervened last October above 150, and that event relieved pressure in global markets, turning interest rate markets (lower) and stock markets (higher).

Today, after strong JOLTS data in the U.S., the resulting dollar strength immediately spiked USDJPY above the 150 level, and then this happened …

The above is a chart of the dollar versus the yen (the line moving higher represents a stronger dollar/weaker yen and vice versa).  As we saw in October, the value of the yen was once again defended above 150 per dollar. 

What does the yen have to do with U.S. yields and U.S. stocks?

Remember, the central banks are working in coordination.

The Western world has been able to exit emergency level monetary policy, while simultaneously running record debt and deficits (without triggering a sovereign debt crisis), ONLY because Japan has been the shock absorber for the global economy.

The dangerous effects of Western world tightening have been subdued by keeping the liquidity pumping from a part of the world that has the most severe structural deflation problem, and the biggest government debt load in the world (Japan).  And it’s well coordinated.

Rates are still negative in Japan.

And the Bank of Japan is still in full quantitative easing (QE) mode.  In fact, they are in unlimited QE mode.

By the design of their “yield curve control” program, in order to defend the upper limit of the 10-year Japanese government bond yield they have the license to buy Japanese bonds in unlimited amounts.  Those bonds are bought with freshly printed yen, which finds its way into foreign asset markets (like U.S. Treasuries and U.S. stocks).

Now, with all of this in mind, there has been speculation that the Bank of Japan will start exiting these emergency policies by the second half of next year.  Is the world going to lose its valuable shock absorber?

With that, let’s take a look at Japan’s long, multi-decade bout with deflation.

We get the Fed’s favored inflation gauge tomorrow.

As you can see in the chart below, it has been moving the right direction, but well shy of the Fed’s target of 2%.

The expectation for tomorrow’s numbers (for the month of August), is 3.9% on this year-over-year number.  On the monthly number, which Jerome Powell referenced in his recent Fed meeting, it’s expected to come in at 0.2%.  

If the year-over-year number does indeed come in below 4%, it will be the lowest since inflation peaked in February of last year (the month before the Fed started the tightening cycle).  

If the monthly change comes in at 0.2%, that would be three consecutive months at that low level, which if annualized the Fed is looking at inflation running less than 2.5%.

This is in line with the cpi data we talked about earlier in the month.

Remember, we looked at this chart …

If both core and headline inflation were to grow at around the average of the past three months (monthly rate of change), the paths would cross by the end of the year, and the core (what the Fed cares most about) would be in the mid-2s by the mid-2024, which happens to be when the market has been expecting rate cuts. 

Of course, the Fed tried to disabuse the market of that expectation in the communications from their September 20 meeting, by removing two rate cuts from their projections for 2024.

They want us thinking “higher rates for longer,” which is intended to suppress demand (despite the sustained disinflationary trend, driven by a crash in money supply growth).

Just like they wanted us thinking inflation was “transitory” back in 2021, which we can only assume was intended to keep the consumption fire burning (in the face of a textbook inflation boom, driven by the explosion in money supply growth).

Are they just prone to mistakes, or are they purposely managing to an outcome?

Let’s hope they aren’t manipulating toward a return of the post-GFC era of sluggish growth and ultra-low inflation, with the threat of deflation.

That would leave us with trillions-of-dollars of fiscal bullets fired, with no growth to show for it (a massive increase in debt, with no growth offset).

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The technical break-down in stocks has been driven by the pain of a sharp 25 basis point rise in the U.S. 10-year yield, in response to the Fed’s meeting last week.  That pain has spread to stock and bond markets in Asia and Europe, as well.

And you don’t have to look too hard to find bad news to compound what looks like vulnerable levels in key financial markets.

But that’s not unusual, especially in the recent history of the past 15-years — in the post-Global Financial Crisis world.

Speaking of history, let’s take a look back to late September of 2021 — two years ago.  This was another rough September, which left the S&P down 5%.

This is what stocks were doing at the time…

This chart is from my September 28, 2021 note.  The “pain” catalyst was mostly driven by a move UP in interest rates (the 10-year yield).

The Fed had turned hawkish, finally telegraphing a change in the direction of monetary policy, from easing to tightening, which is historically bad for stocks.  

Add to that, there were two other negatives weighing on stocks back in September of 2021:  1) concern about the Chinese financial system, namely a default by its biggest real estate developer, and 2) a potential U.S. government shutdown.

Stocks rallied 12% in the fourth quarter of 2021, finishing on the highs.

Let’s turn attention back to the current chart (the first chart in this note) …

First, you’ll notice the level of the S&P 500 is right where we were two years ago (low 4300s).  So, after two years of rate hikes and (indirect and direct) demand suppression by the Fed, the global risk proxy (the S&P 500) is nearly unchanged.  

The factors weighing on stocks are similar to that of September 2021 (rising rates, a threat of government shutdown, problems in the Chinese property market). 

But now we have a Fed that is, at worst, one more rate hike away from telegraphing a change in policy direction (from tightening to easing).  At best, they are already there.

With all of the above in mind, going back through almost 80 years of data, we have a 10% decline in stocks, on average, about once a year. We’ve yet to have one this year.  If we test the 200-day moving average (the purple line in the top chart), that comes in at 9% below the July lows.  That’s just 2.3% lower than today’s close.

This puts us on the path toward Q3 earnings in a couple of weeks, where expectations have, again, been dialed down — which sets up for positive surprises.