Hey everyone and thanks for jumping back Into the macroverse today we're going to Talk about the United States Unemployment rate and the effect that's Likely going to have on the Federal Reserve and risk assets if you guys like The content make sure you subscribe to The channel give the video a thumbs up And also check out into the cryptoverse Premium at into the cryptiverse.com Let's go ahead and jump in so we got the Most recent jobs report today and all in All I mean it was a fairly impressive Jobs report with non-farm payroll coming In way overestimated way overestimated And you know I've seen various takes on That some people don't really believe it Some people say that we just need better Seasonal adjustments and whatnot but Regardless at the end of the day it's Important to know what effect did it Have on markets right so 3.4 Mark say Marks a new secular low you know for This cycle go take a look at where the Unemployment rate has been and I mean Really it's been between three and a Half to three point seven percent for Basically last year and now we're now We're all the way down to 3.4 percent to Find the unemployment rate As low as 3.4 percent You'd have to go all the way back To 1969. To see it to see its out loud okay now
Why is that something you know worth Talking about right well you know all The way back over here when it got down To that level it actually stayed there For like a year or so and then Eventually eventually the you know I Mean you can see the the stock market Um hit sort of a major top right here And then slowly went down one of the Reasons that went down back then of Course we know is because inflation Started to go up so this brings us to Our question right well Does the unemployment rate going down is That more likely to make it so the Federal Reserve will raise the terminal Rate you know the FED funds rate and and The answer to that according to the Markets is yes now The jobs report it might seem like it's Only you know it's it's bad news in Terms of where the terminal rate's going To be meaning it's going to be higher But there was some positive developments I mean the in terms of wage inflation or Wage growth we've actually started to See it moderate some so it's not you Know so that that one of those things That the FED is the most worried about Has actually has actually continued to Moderate At least here in the short term right I Mean we don't know what's going to do Six months from now but at least here in
The short term it's moderated a little Bit so you have a tighter labor market But the inflation component which is Arguably what the FED cares about has Actually started to come back down it's Continued to slowly come down right so That's just something to keep in mind It's not the worst support in the world Even though the labor market has has Gotten a bit tighter with that said what Do the markets think of this with Regards to the terminal rate Well if we go take a look let me reload The page because this is updating every Every minute it seems Um now For March the market is saying about an 82 chance Of another 25 basis point rate height 82 Percent but what's more interesting is If you go to May And right now there's actually a decent Probability of another 25 basis point Rate height which was not really the the Most likely outcome just a couple days Ago If you go over here to the compare tab And take a look at at you know the Probabilities so on January 3rd the Likelihood that may was going to see That 25 basis point rate hike was only 40 percent and then on January 27th I Think it went down to 33 and then on February 2nd it was as low as 30 percent
But after the most recent jobs report That number has shot up to 48 percent So Clearly the markets think that you know There's reason to believe the FED could Go higher than was originally price you Know then it was originally priced in in Terms of the terminal rate So it'll be interesting to see how these Numbers change throughout the coming Weeks Um and I mean I imagine the inflation Component well you know the inflation Report that we'll get in a little over a Week from now like 11 days 10 or 11 days From now I mean I guess it depends on When you watch this video but It'll depend on where that comes in you Know does do we continue to see Moderation in the inflation rate is it Coming down in a linear fashion is it is It somewhat sticky we'll have to see but So far we can see that the market at Least in the short term has considered This jobs report to mean the FED is Likely going to go higher than what what Was initially priced okay If you go out to June you can see the Most likely outcome is is only five Percent July it's five five and a Quarter so you can see these Probabilities all over the place but if You go out to November the market is is Here at five and then December back to
4.75 so the market is still expecting Some Cuts if you go to the probabilities Tab you can kind of see the the blue Here shows the most likely outcome for For each each month you can see it's 82 Then 48 percent so 82 for another 25 Then 48 for another 25 and it's kind of All over the place but then by the end Of the year the market thinks you're Going to see a couple of rate Cuts all Right Now the only way I think you're going to See rate Cuts is if as if something in The economy starts to go wrong to make The FED want to cut because the fed's Already been clear they don't really Want to cut this year uh so if if the Fed's wrong and they are going to cut This year it means that something you Know there's got to be something that Would make the FED pivot and at this Point there's just nothing really that's Going to make the FED pivot and we said Before right you can look for signs of a Recession in a thousand different Indicators but the only place that Really matters is the unemployment rate Right I mean if the unemployment rate Remains at a secular low I don't think you're gonna see the FED Blink in you know in any way so Again you can find the signs of a Recession just don't look just don't Look in the one place that matters right
And that's the labor market and until The labor market softens up I don't I Don't think you're gonna see the FED uh You know become become too much more Dovish right now they might just get to Their terminal rate and then pause but I Don't think you're going to see them cut Rates until until something really Starts to slow down in the economy which According to labor market has not yet Begun to occur Now if we go take a look At inflation overlaid with the Unemployment rate you'll see that with The unemployment rate over here in the 60s it was not a good thing for Inflation so inflation started to go Back up at that time so you can see Inflation was going up in the or in the Mid 60s and then it started to come down A little bit in 67 and then it started You know it went back up to the upside As the unemployment rate continued to Come down right now the unemployment Rate's coming down and I imagine the Federal Reserve would like to see this Coming you know continue to come down And in fact I think for the first time Powell said that we're now seeing signs Of disinflation and the market really Likes that news and the market rallied On that news because the market of Course wants to hear Powell who is going To be very reserved in what he says
Mention that you know at least Acknowledge that there's some element of Disinflation going on and you can see That there's no denying it that headline Inflation continues to cool coming up You know coming from 9.1 percent in June All the way down to 6.4 6.5 percent now That we're in um Or at least as of as of December so Clearly that's a good thing the main Question of course is will a a tight Labor market lead to you know an the Re-acceleration of the United States Economy will it lead to higher higher Wage inflation well again so far the Most recent report says No in fact it Says it's moderating wage inflation is Moderating but again I mean you know This is one of those things that will Only be more obvious in a few months We'll have to see how it plays out over The next few months and see if it if Inflation continues to come down in the Short term inflation has been coming Down quite quickly the one thing I would I would potentially look at We gotta take a look just really quickly Uh inflation year over year It's been coming down in a very linear Fashion if you take the monthly change Then the only real question is is it Starting to curl back up meaning is the Rate of change gonna start coming back Up so that to where that it becomes
Sticky or will it continue to go down in A linear fashion I don't know right we Just don't have enough data points the Rate of change has been slowing down but If it if it stays constant at this level Then the you know then this is going to Continue to go down in a linear fashion So it all depends on on where does Inflation come in in here in a week and A half or so Which sort of brings me to my to my next Point Um If you take a look so if you go take a Look at at the trading economics website Okay so let's go to Um it's the wrong tab so let me let's go To inflation rate month over month Last month was negative point one Percent Okay which is a good thing especially Compared to what was going on over here In 2022 This website training economics is Suggesting it'll be another negative Point one percent in January for that When we get this report here on February 14th Which would be a good thing right I mean If it's negative point one percent again That'd be a good thing How is this you know has this been an Accurate forecaster in the past well Over here they predicted 0.5 and it came
In at 0.1 here they predicted negative 0.1 and it came in a negative 0.1 so we Have a mixed track record well what's Interesting is if you go to the Cleveland fed they're predicting for January Month over month percent change of Headline CPI to be 0.63 percent Which is quite different than what the Trading economics website is saying Right I mean you're talking about 0.63 Percent Versus negative 0.1 but 0.6 I mean That's that'd be you know similar what We had in January 2022. So I don't really know who to believe to Be completely honest I mean I wish I Could give you the answer I I don't know I mean I you know do we believe these Guys that say negative point one or do We believe the Cleveland flat the Cleveland fad that says 0.63 So This is going to be something that I I Think and then they're currently Suggesting that February is going to be 0.49 of course we only just started this Number is subject to change I think they Updated basically every single day but This is a a pretty big number so we'll See where it comes in we'll see who's Right you know is it the Cleveland fed Is it trading economics maybe it'll be Somewhere in between right maybe it'll
Be somewhere between negative point one And and 0.63 but If that does come in hot then I imagine It would you know you would see the um The interest rates the the FED funds Rate uh you know probably price in a Higher terminal rate meaning you know Market would probably become a bit more Sure that it's going to hit 5.25 and Right now it's kind of all over the Place it's moving back and forth you Know 48 chance of 5.25 by may but I mean You know by the time you're watching This video this number can be a lot Lower it could be a lot higher Market is Really starting to digest this most Recent jobs report which again is is a Bit all over the play or a bit bit of a Huge surprise to a lot of people as to Where it actually came in Some people don't really believe it and Again some people just say that it's not It's just not adjusting for seasonality In the best way so these are these are The things I'm watching right now right So you have you have a historically low Tightness in the labor market at 3.4 Percent History shows that's not really great For inflation but the most recent jobs Report says that inflation the wage Inflation is moderating at least a Little bit you have the FED saying you Know that they're happy to see inflation
Coming back down but Powell still would Not like to see this tide of a labor Market so despite the fed's best efforts The labor market remains historically Tight So because of all that Markets are saying all right You're right you know it's going to be a 25 basis point rate hike in March and Maybe it'll be another 25 basis point Rate hike in May okay beyond that I mean You know you can go out to June and They're you know there's still no the Market doesn't not really think there's Gonna we're gonna go to five and a half At least not anytime soon maybe about July there's a 20 chance we're at five And a half clearly the market does not Think that's the most likely outcome by July they're saying it'll still be at uh 5.25 that's the most likely outcome So then where does this fit in because You know we've talked about this idea of You know is the is the United States Going to head into a recession or not And I mean of course there's a lot of Indicators that suggest it eventually Will but again don't look in the labor Market for it because the labor market Is not showing that right now if you Guys remember we put out a video I think maybe a few weeks ago on the Smooth recession probabilities chart and I wanted to provide an update to that so
This chart talks about you know it's a a Dynamic Mark a dynamic Factor Markov Switching model and it's using non-farm Payroll the index of industrial Production real personal income Excluding transfer payments and real Manufacturing and trade sales in order To figure out what is the likelihood That we're in a recession As of December the likelihood is five Percent Now you might say well five percent one In 20 I'll take my chances right I mean And I I agree you know I mean the Likelihood that we were in a recession In December 2022 was not very high so do We just completely discount this well The one thing I would say is that this You know this is the highest it's been Since the financial crisis right I mean Like Look at look at it like this if you zoom In to 2011 And we just look at where it's been Since 2011. I mean it's been hit really really low And now it's shooting up Almost five percent Still relatively low and there have been Plenty of times where we had these sort Of false readings where it went up we The market went down but as high as 10 Or 11 percent here and it and we did not Go into a recession so this was what
Happened in 2005. if we go back even Further you can find another example of It here Market was still going down but We went up to about 13 probability of a Recession The other instances where it went up Well I guess here's one more here's one More instance Um where it was a 30 chance and it was Not actually we did not actually go into A recession so you can find three Examples where the probability went this High or higher we did not go into a Recession the other example is all dead So this is something we're gonna have to Keep in mind now remember this includes Non-farm payroll Okay and non-farm payroll Just blew out expectations absolutely Annihilated it all right and so you know This is going to be a positive think Okay for you know for Avoiding your recession at least at Least right in the short term right Now remember the the smooth recession Probability indicator only updates once A month so it updated Um like yesterday before the job support So it updated before we got this most Recent data data point on non-farm Employees so with this data point the Probability might actually be a bit Lower But we I mean we just have to get we'd
Have to take it one month at a time the Other I mean of course there's other Um Data points such as the you know the Index of the index of industrial Production which has been Not doing so great right if you look at The monthly change of that It's been job it's been dropping okay so That's been sort of contributing to why It thinks where it was more likely a Chance of of going into recession if you Look at at the prior times and it was This low They're going below zero second three Month estimate or the weekly chain or The monthly change again it normally Corresponds not always right there's Some false false readings but normally You'll see uh or you might see a Recession in that in that sort of regime Especially if we hang out there for a While so you know the point is is If you want to look for a signs of a Recession you can find them everywhere Except for the labor market okay and the Labor market is at a secularly low level At 3.4 percent That means that the FED should not be That worried about raising interest Rates a little bit higher you know I Mean there's always a chance they could They might have to slow down before People think if um you know if it if if
Something comes out and it says or if Something's breaking somewhere then Maybe they have to stop before you know Before we actually get to what the Market's pricing is the terminal rate But until until you see a Slowdown in The labor market I I think the FED is going to keep Um going with 25 basis points until you Or at least until you see inflation come Back down to earth so either a sustained Path back to two percent inflation or You see the labor market start to show Signs of weakness and um and right now We're just simply we're simply not Seeing that okay inflation is coming Down the labor market is tight but wage Inflation is moderating we're now Pricing we're starting to price on a Higher terminal rate and and the market Is now sort of digesting what does that Mean can the market handle it you know What does that mean for earnings Etc So hopefully this video has been useful Um We'll just take it one step at a time And you know with regards to risk assets As we said before right I mean they've They've continued to Rally throughout January and early February on on sort of These hopes that inflation subsiding Without sending us into a recession and Until until you see either inflation go
Back up in a material way or you see Um the real deterioration in the US Economy potentially via the labor market It could be you know via earnings if Earnings are are very bad but a lot of Times earnings bottom after stocks do so I mean earnings would have to get very Very bad for that to be the only reason I think so you'd have to see the Weakness in the labor market or you'd Have to see earnings come in well below Expectations I I think but I mean you Know these are all all things because The other thing right we showed are on On the most recent video That I think is important to follow is Is uh you know the financial conditions Right liquidity and and excess liquidity I think is is useful for for navigating Financial markets as well uh so we'll Continue to keep an eye on that but Again thank you guys for tuning in Hopefully this video is useful to you Make sure you subscribe give the video a Thumbs up check out into the crypto Versus premium at into decryptiverse.com And I'll see you guys next time bye
