Episode Transcript
[00:00:00] Speaker A: The markets. We just can't get enough of them.
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Welcome to episode 179 of Magic Markets. This is just before I am going overseas, Mo, so thanks for rejigging our schedules a little bit so that we could get this in before my trip to go and watch Le mans, just to make people jealous who love motorsport and a bit of time in London visiting my cousin in Dubai. So I'm looking forward to that. Today you're going to take us to the US, though, with a whole lot of jobs data, and we'll talk maybe a little bit about us retailers and some of the consumer businesses that we've seen. But this is part of our sort of recent shift in what we're doing to bring some of the macro stuff back into the show to our listeners. Let us know what you think of that and whether or not you enjoy it, and that's helpful to you. It's always been our approach here to say that macro and bottom up are both really, really useful. So, Mo, looking forward to learning from you, as usual on the macro stuff and talking about us jobs. Yeah, indeed.
[00:01:42] Speaker B: Ghost, I think while you go and Yolo, some of us actually have to hold down our jobs. And so it's quite appropriate that we're speaking about jobs on this particular show. I think it's also important we're recording this early in the week, you know, but while you're out yoloing at Lamar and in Europe, we're going to not just have the outcome of some of these jobs data. We've got FOMC meeting this week, so by the time this show is released, we will know whether the US Federal Reserve has actually cut rates or not. The market expectation right now is for the US Fed to stay on hold. And again, this is in contrast to what we saw last week where we had the ECB and Bank of Canada being amongst the first global major central banks to actually commence a rate cut cycle. So in this context, it's really so important to just look at one of the key economic data prints that the market fixates on when it comes to monetary policy and decisions, what's happening with the rate cycle, and that's jobs, and why it's so important to unpack. This is unlike in South Africa where you generally tend to get one unemployment data print that comes out. It's not that frequent in the US. There's a whole host of economic data that comes out just around jobs. And I want to start off by just unpacking what those are. And when we look at it on a headline level, there's first and foremost what you will have heard of as non farm payrolls. And that's usually a data print that is released monthly. It's typically the first Friday of the month, and that is data released by the US's Bureau of Labor Statistics. Now these are the official government labor data prints. It does contrast, and I'll outline how it contrasts with some of the other data prints that come out. But non farm payrolls tends to be, if you want the final word on jobs in the US, you tend to look at that NFP data. Now how does this differ from another data print which you would have heard of, which is the ADP data print that comes out? Well, ADP, that's also a monthly number, but it's actually put together by a private company and it really just looks at private sector employment. So the main difference between non farm payrolls and ADP is that non farm payrolls also tends to include the data around government jobs. And why I want to highlight this particular contrast is certainly in a time when the US has been very fiscally expansive. Sometimes you get a massive disconnect between the two. Usually they tend to correlate, yes. But at times you get this massive disconnect between ADp's data and the NFP data, and the delta between that sometimes tends to be the government jobs. So always keep an eye out. And in my second talking point, I'll unpack just how last week's data we actually saw some of that differential come through between ADP and NFP. But before I wrap up on this initial section, there are other data prints. I mean, if two weren't enough, you've also got initial jobless claims. And wait for it, this is a weekly data print that comes out from the Department of Labor. And as the name suggests, it really just gives you an indication on the number of individuals that are filing for unemployment benefits for the first time. Now, alongside this, you also get something called continuing jobless claims. And these are the people that are continuing to receive unemployment benefits. So you've got to look at those two data prints together. It's really a symbol of what's unemployment doing in the US? And how does that actually correlate with the headline jobs growth or shrinkage in the US economy? And then a last one is another data print that is monthly. It's called jolts. And yes, you know, points for an interesting sounding acronym, but it really stands for job openings and labor turnover survey. And this last data print, again, just giving you a different cut on the data. It has a look at who's hiring, who's firing, what are the job openings there, and it gives you a sense on just general turnover. How tight is the labor market, what is the, let's call it the viscosity of labor in the us market look like? Those are the major kind of economic data prints when you're looking at the jobs market in the US. And like I say, some methodological differences. But when it comes to deciding on monetary policy, you look at what all of these data prints are telling you. That certainly feeds into the Fed and their decision making process, as I indicated. And we're finding ourselves at one of those junctures right now. Ghost.
[00:05:50] Speaker A: Yeah. Meanwhile, in South Africa, unfortunately, we're used to the unemployment number just going one way. And then what ends up happening here, obviously, is that unemployment number makes it look like just this vast portion of the population have no income. But in reality, of course, we have a massive informal sector here, and that just does not get captured at all in those employment numbers. So the unemployment numbers in South Africa do a good job of showing you the pressure on the fiscus and obviously on people and how they are making their money and their livelihoods. But down here, it really is almost a formal employment measure, as opposed to how people are actually hustling, literally, and generating an income. I don't know how much of that there really is in the US, but I'm guessing nowhere near as much as in South Africa.
[00:06:35] Speaker B: I'm so glad you bring that point up because it's a bone of contention. I mean, when I speak to other macro strategists, we really, they are big question marks around how relevant are historic, you know, the way we've constituted this formal data, how relevant is that to the new gig economy? And I would say, yes, you know, even in the US, there is a significant portion that's now maybe falling outside of the official employment stats, there are a lot of people in the gig economy. There's a lot of money that arguably flows through with people's side hustles, and that's not being captured in the official jobs data. So you do have to actually look at jobs as one data print. You also have to look at other indicators, for example, personal income, personal spending. So that's the reason why I would say very dangerous to just kind of hinge on a single data print. But yes, jobs are important. And again, the market is wired a certain way, and that's the reason why jobs take such a key focus when you're considering the impact for monetary policy. So I'm going to actually go into what the data told us last week because as I indicated, we had this, this divergence that came through. And so I'll start off first with the ADP data. And remember, this is just private businesses. And they actually showed that in May, private businesses added 152,000 workers. Now, don't salivate, these numbers look really attractive, right? When you're looking at South Africa, where we know the jobs market has been really tough for quite some time, 152,000 new workers in a month seems immense. Yes, we know the US is a much larger market, but the important point on the ADB print last week is that it actually underperformed the market's expectation, which was for 175,000 jobs. So that was a miss. And that suggests, remember, bad data here might actually suggest that the Fed should actually cut rates. Remember, this came first, and then we have the NFP data that comes out after this. This was the smallest increase in four months. And so the market may have gotten a little bit excited around this, saying, hey, you know what? The Fed's actually got to commence its cutting cycle. We saw cuts from the ECB, the Bank of Canada. Maybe it is time now if we contrast that to what the NFP data said when we look at NFP, as I indicated, this will now include some government jobs in there, and it's non farm, so you exclude the agricultural sector. They added 272,000 jobs in May. And this was actually better than the market expected and was the highest gain in five months. So again, remember what I said, you sometimes see those divergences between the private sector jobs numbers and the official jobs numbers. This is one of those instances where private sector a disappointing print. When we look at the overall jobs mark, the official jobs data, a significant beat on the market expectations and the highest in five months. Now, if we unpack that a little bit, we actually saw a lot of hiring come through in healthcare, in government, as you'd expect, given the divergence, but then also in leisure and hospitality. Remember, we are going into the summer season here, so you generally tend to see some of that uptick come through around this time of year. But despite this headline number being a significant beat, unemployment in the US actually increased to 4%, which is the highest since the start of 2022. And the reason for that is we actually had more people coming into the jobs market. Labor force participation, actually, interestingly enough, saw a slight decline, though. And so wrapping all of this up, it's a very complex picture. And it's why I say you've got to also look at average earnings, because that's released alongside the NFP data. And average earnings increasing by 4.1% year on year. This was better than expected. So in aggregate, the data prints last week were actually better than the market expected. And this is why in the Friday's trading session, we saw bond yields in the US tick a little bit higher, kind of flat on the, on the weekly basis, you know, where it started and where it ended the week. But it was significantly off the lows that we had seen around the middle of the week when the market thought, hey, jobs market soft, the Fed might cut it, ended the week thinking, well, maybe the Fed's actually got some reasons to keep that on hold. If we actually reverse that out into the impact for equity markets, we know that the prospect of rates remaining higher for longer does tend to hit equity valuations, and certainly for higher growth stocks, which tend to be a lot more sensitive to interest rate changes. And then on a sector basis, remember, if rates do stay sticky for a longer period of time, sectors like tech that have been running hot, that do actually have these higher discount rates on future earnings, they might actually see some pressure. That wasn't the story last week. But ghost, I'm keen to hear your views in terms of maybe some of the other sectors, because I know we do a lot of detailed on the groundwork, bottom up work. What do you think the implications are for us retailers and some of the other sectors we've covered, for example, with regards to, let's say, quick service restaurants. What are your insights there? Ghost?
[00:11:21] Speaker A: Yeah, I'm glad you raised the equities point, because the assumption is, oh great, jobs beat expectations, so now the market is doing really well. This is wonderful. And yet you can sometimes then see equities doing badly because of the point you raised there on inflation expectations. And what does that mean for interest rates. And what does that mean for stocks that earn their money today versus years in the future? So it's a very weird one. It can be very counterintuitive, actually, that just because jobs data looks good doesn't mean that's a net positive for equity. So it really does depend on the sector, as you say. So for a sector that is more exposed to longer dated cash flows. So that would be your frothy growth stocks. They are desperate for interest rates to come down. Remember, those were the stocks that did incredibly well in the pandemic in that zero interest rate environment. So anything that brings those interest rates down really helps those growth stocks. So if that means the employment data looks horrible right now, you might think to yourself, oh, you know, what does that mean for their near term growth? The reality is the growth in those companies is actually very long dated. And so they are net beneficiaries of crummy looking jobs data right now that helps interest rates come down. But if you're going to have a look at other companies in, say, the retail sector, for example, so what they want to see is an improvement in the jobs data. And of course, that's because people then have more money to spend. And what we are seeing among a lot of these us companies, you know, they're not immune to the challenges facing consumers. So it's easy to sit in an emerging market and look at the US and say, oh, you know, there's so much money there. Consumers just always have money. And hence, what is anyone worried about in the retail space? But it's all relative. Consumers can struggle in literally any country in the world. The struggle might look different, but it's still there. So you can see it in all kinds of different retailers. And what I will raise as well is that a lot of american retailers have looked offshore for growth. So those us stocks are not just based on us jobs data, it's actually based on global consumer spending. So McDonald's, for example, they just had their biannual, not biannual, biennial, which means every two years worldwide convention outside of North America for the first time in 70 years. So for the first time ever, they've had their convention outside of the US, attendees from nearly 100 markets. So that tells you something about where McDonald's is seeing the growth opportunity. It's not just in the US, that's for sure. And the good thing is that some of the businesses that have actually been doing really well in emerging markets have then learned how to bring in these value offerings and they bring it home to their markets like the US in the form of for example, smaller, more affordable meals. Obviously the likes of McDonalds has always been a low cost offering. So its not surprising to read about a focus on affordable meals there. But it feels like theres more of a focus than usual. And part of that is just because of whats happened in the US job market, but also inflation, another very important macroeconomic indicator that tells you a lot about what's going on at these businesses. So to give you an idea, the focus in the US for McDonald's is on meal bundles of $4 or less. That's kind of the point at which they call it real value type stuff. I also read recently at Walmart, they've now released a new private label range focused on, I think it was dollar five or less as the price point. So that very much lines up with McDonald's. So I mean, if you put that into rands, $4, $5, that's still actually quite a lot of money. Here in South Africa, you can get value meals for less than half of that. So it shows you it's still an expensive market there in the US. But it's not to say that cheaper meals also mean less profits for these businesses. They obviously aim for a certain gross margin and they then adjust either the size or the ingredients to try and get there at a specific price point. And the overall business can end up better off because they are then maximizing throughput. There's absolutely no point in being stubborn on pricing and then no one is buying your product. So they look to really get those assets working, maximize throughput, keep the McDonald's busy, the Walmart's busy, even if that means the average item in the basket has come down in price. If they can lock in a decent gross margin and get enough throughput, they are still achieving very juicy operating margins. It is not to say that a retailer or a consumer facing business just because the prices are higher that the business is better.
[00:15:46] Speaker B: Yeah, Ghost, that point you raised around the price of, let's call it your value offering amongst some of those QSRs, the quick service restaurants is so critical because it also explains some of the interplay between, I guess what I would call the importance of the North American market. Because as we indicated, yes, the growth might be ex us, the growth. You know, these companies are global companies, but it also highlights that in the US, if you're looking at the lower end of your consumer, that's still a $5 price point versus the equivalent of what you've got to generate out in an emerging market to generate the same kind of revenue if we assume similar margins. So I guess that's the interplay between the emerging markets exposures. You probably need a lot more customers and much faster growth in order to replace the one us consumer that you might be losing. The other interplay, which is quite important. Why it's important to highlight that the jobs data is just a single data print, is that we've looked at income levels in the US. We look at earnings growth, for example. That's, that's personal income that comes through. How does that interplay with global trends? Because this all feeds through in a loop. If we look at the US Fed, yes, they haven't moved yet. And if the US Fed keeps rates higher for a longer period of time, whether you like it or not, that does have a bearing on emerging market central banks as well. If the base rate, the risk free rate, if you want to call it that, stays higher for longer, it does curtail the ability of emerging market central banks to consider rate cuts in their own economies so that ex us or ex north american growth is still ironically impacted by monetary policy in the United States. Now, why does that actually happen? Is like I say, if an emerging market central bank considers cutting rates while the US keeps their rates on hold, the relative yield differential between the two starts to look less attractive. That then impacts what is called the carry trade, and the carry trade impacts foreign flows. So you start to see the impact come through in terms of currency markets. Now, the reason I highlight all of this is it's just so important for our listeners to try and contextualize. And what we're trying to do with these shows in magic markets with regards to the macro discussions, is how do you join the dots between the headlines that you're seeing on macro data points, hey, the Fed's cutting, or hey, the Fed's not cutting, what does that mean for you sitting down in South Africa? Well, if the Fed doesn't cut, it means that the South African Reserve Bank's probably going to have to keep rates on hold for a slightly longer period of time. I'm not saying they're codependent, but I am saying it does factor into their deliberations. And that then filters through to monetary policy in South Africa. What happens with the cost of money in South Africa? And then what happens with businesses that are looking to invest? Because remember, as rates come down, it decreases the hurdle rate for new investments. Could that incentivize an investment led growth story? Well, if you want to know our thoughts on that and if you missed last week's show here at magic markets, go and check that out, because I think we tried to unpack some of those factors in the show last week.
[00:18:38] Speaker A: Yeah, we absolutely did. And that's just part of our focus on trying to get the macro story back into this and helping people understand that top down, not just the bottom up. So to our listeners, let us know what you think of this and also any other macro concepts that you want to learn. Actually, I think Mo is a wealth of knowledge on the macro stuff. And also if there are specific sectors or stocks that you would love us to have a look at on the free show, let us know. And of course, in the premium show, there's a wonderful library of research reports on international stocks, and you can get a lot of detail there on the bottom up approach to our listeners. Thank you so much for joining us on the show. And Mo, thanks for sharing all that information and knowledge about the us macro picture and especially how it filters down. I think it's really valuable.
[00:19:19] Speaker B: Yeah, ghost, I mean, I love doing this and you know, Macro is really my playbook. So the ability to blend the macro with the bottoms up, that's really what I think the value proposition here is at magic markets as our listeners, let us know what you think of the new format and some of the content we're putting in there. Reach out to us on X. It's a pod. One word at Finance. Ghost and that Mohammednallah or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this. Until next week, same time, same place. Thanks and cheers. Ciao.
[00:19:47] Speaker A: This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
