Payrolls Come in Weak, Unemployment Ticks Higher transcript

Hey everyone and thanks for jumping back into the macroverse. Today we're going to talk about the most recent labor market report and we're going to go through uh what that looks like. We'll also talk a little bit about yields uh and a few other things. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and also check out the upcoming ITC conference, Investing Through the Cycles Conference.

Link is in the description below. and we're now less than 2 months away. So, make sure you guys get your ticket. The unemployment rate came in slightly higher than before. It it's somewhat benign in in in one sense because last month I believe it came in at 4.14% which rounded to 4.1 and then this month it came in at 4.18% which rounded to 4.2. So, the unemployment rate has started to move up a little, but you know, we're still in the early innings to know if it if it really matters or not.

Now, what's interesting is if you look at the unemployment level by reason for unemployment, the people who have lost jobs, that actually went down. So, that actually dropped from 3.25 25 million to 3.2 million. And if you look at even job losers on temporary layoff, like that basically was flat. If you look at permanent job losers, that went down. If you look at job levers, that went down a lot. So then why did the unemployment rate go up?

Well, there's a few reasons. One reason is because people just simply trying to find a job are having a hard time. If you look at re-entrance to the labor force, that went up. And then if you look at new entrance to the labor force, that also went up from 702,000 up to about 818,000, which if you ignore the December move, the current number is as high as it's been uh in over a year. Okay. So what's what's occurring right now is that hiring is down, but layoffs are also down.

If you look at hires, hires are really low still, right? Like they haven't really recovered back up. And so as long as hiring is down, it's actually making it more difficult for people who don't have a job to find one. And that's also sort of baked into the job openings as well. Like job openings has been relatively soft for a while. So people are having a harder time finding a job, not necessarily keeping a job, at least right now.

If you look at layoffs and discharges, that also went down. So what's happening is that more people are choosing to participate in the labor force. If you look at the labor force participation rate, this is this was actually one of the main reasons that the unemployment rate was going down for the last year is because if you look at the labor force participation rate, that had also been trending down pretty quickly. You know, cuz back in September of 2025 or October of 2025, the labor force participation rate was 62.5%.

But that dropped a full percentage point right down to 61.4. 4 and now it went back up uh to 61.8. So a large reason for the increase in the unemployment rate is because of the labor force participation rate actually expanding. And if you look at the unemployment rate and I think we can sort of look at it and look at it as a function of age. If you look at it for say 16 to 19 year olds, that had a a fairly large increase the last couple of months.

So again, 16 to 19 year olds are generally going to be new entrance into the labor force, right? That's gone up from 12.1% to 14.5. Now, you might say, well, the S&P, the NASDAQ, all that stuff is basically at all-time highs. Again, markets generally go to all-time highs. Occasionally, you have corrections, but markets generally go to all-time highs. And also 16 to 19 year olds are not the ones keeping the index up in the first place.

Now if you look at 20 to 24 year olds, these would represent, you know, even potential college graduates that had fallen a lot from September 2025 and it was still fairly low recently, but it's started, you know, moving back up, right? Like now it's back up to 8%. And so what you're seeing right now, if you're watching this video and you're, you know, younger, right? Let's say you're in college or you're just out of college and what I'm saying doesn't really make sense because it's hard for you to find a job.

So when people talk about their it not being a difficult labor market, it is for you, right? So, we shouldn't we shouldn't gaslight people that are in their early 20s and be like, well, you know, just go find a job because we have a great economy. It it it actually is a lot harder. The unemployment rate for people between the age of 20 to 24 is around 8%. Okay, which is, you know, it's starting to get up there. Um, and I think that's important for us to recognize that the economy is is sort of split into different parts.

Now, when you go look at it for 25 to 54 year olds, that's where it hasn't really moved. It's been at 3.6% for the last several prints, and it's down since February of 2026. And you could argue that this cohort is some of the people more responsible for keeping the S&P at those all-time highs. Okay, now that covers that side of it. Now, we also had the total non-farm payroll, which came in weaker than expected. All right, total non-farm came in at just 29,000, but consensus was well above that, right?

It was well above that. And if you look at I believe we have it here on the uh the calendar you can see that it came in at 29,000 previous was 133,000 which I believe was revised down already and then consensus was actually 90,000. So while the unemployment rate went up a little and it was mainly due to people entering the labor force and more participation rather than people getting laid off. If you look at non-farm payroll hiring and whatnot, you can see that it it came in relatively weak.

And so if you look at that on this chart and look at a quarter overarter basis, you know, it's only at 152,000. Now year-over-year, it is at 496,000. Recessions tend to occur when this goes below zero. So, every gray shaded region on the chart represents a recession in the United States, and they all correspond to the year-over-year change in non-farm payroll going negative. And you can see it came really close to being negative at in early late 2025 and early 2026, but then it rebound slightly.

And and so this is something if it were to deteriorate again with rising rates like it did in 2022 2023, well there's not as much excess now, right? There used to be a lot more excess. Now there's not there's not really a lot of wiggle room in in this metric. So, this is is something to continue to watch because on one hand, the the the payroll report isn't really that bad by a lot of measures, but for younger people, it kind of is.

And it it is hard to find a job if you don't already have one. It's the people that already have a job are having they're not having a hard time holding on to it. Uh it's it's been fairly easy to hold on to it. I'm not saying that it's been easy for everyone. I know there are people that have been laid off, but layoffs are part of a normal economy. If you if you look at layoffs and discharges, we already showed this chart earlier.

We're we're at levels below where we were before the pandemic, right? Like if you have a moving average of this, a seven-month moving average, it's currently at 1.74, but before the pandemic, you know, it was trending above that. So layoffs are normal in all economies. It's just that when you have recessions, it tends to really start to go up. And that is what you don't want to see. Okay. Now, what's really interesting is how the labor market result has affected yields and what yields are doing to the bond market, right?

To to credit spreads as well. If you look at at um yields, what you'll see is that the long end of the yield curve, right? So, if you look at at the 10-year yield, the 20-y year, the 30-year, that's up on the day, which is kind of interesting because now you have two somewhat soft reports. Okay, you have the soft PCE report that we had just a few days ago and now you have a somewhat soft labor market report, but yields are still up on the day.

So clearly there's something the market is still worried about because if you have a weaker labor market, it would make sense to see yields go down because then yields are not as worried about inflation. They're more worried about growth. But what's happening is that inflation is still a problem. In fact, Tokyo just reported their headline CPI, not not the full country of Japan. We'll get that later, but just Tokyo. And it came in well above what was expected.

I think they were expecting 2.4 four and it came in at 2.7 which is fairly substantial to be off by by 30 basis points. Right? So the question is is that a sign of what's going to happen in other countries, right? In other large cities, are we starting to see inflation go back up? And when you when you think about the quote unquote soft PCE report, you have to remember that they did revise how it was calculated as well.

Now, I'm not saying it didn't come in soft anyways, but there were some revisions there that we have to at least consider. Now, one of the things that has happened because of rising yields is that credit spreads have started to widen. Okay? Now, credit spreads, we have three different ones we track here. Um, we have US high yield, US investment grade, and CCC. So, we'll start with CCC. Uh, that one looks the worst. It's kind of the lower ones.

And you can see it's been moving up relatively rapidly. Okay, now it's currently at around 12%. Now, in and of itself, 12% is not necessarily that bad. Okay, it's not. We've we've been at 12% before at times and the market has shrugged it off. You will notice though that during a lot of the major drops in the stock market, right, it tends to correspond to a rise in credit spreads. Okay, this time that has not happened yet.

The stock market is at all-time highs. And so what we have to figure out is I don't think the stock market is going to stay where it is for very long. It's either going to break the highs very soon and and continue much much higher or it's going to break down like it did in in the last three midterm years. And I don't have the answer for you. But what I will say is this. The reason why I think something has to give the Russell the small caps, right?

If you look at the Russell 2000, the Russell has been dropping a lot. Okay, the Russell's down. you know, it dropped about 10% or so and it's up today, which makes sense because there's a little bit of a reprieve in yields. It's the yields aren't up, you know, a lot today, probably because of the soft labor market print, but they're still up. The Russell's dropped about 10%. While the S&P is essentially at all-time highs.

So, one of two things probably have to happen. either the Russell mean reverts back up which pushes the S&P higher or the S&P follows the Russell. And there are instances where both outcomes happen, right? Like I I've gone through so many different times in history to see like what is the most likely outcome. And what I you know what I had looked at previously and the reason why I had thought you know a a Q4 drop is a risk is because in 2018 and and other times right so if you look at at 2018 you can see that the Russell uh was dropping right the Russell topped in in August and was dropping quite a lot but we also know that in 2018 the S&P was still basically at all-time highs even on October 3rd it was like a slightly lower high, but still basically at all-time highs.

But the Russell by then was already down 4 to 5%. While the S&P was at all-time highs. So either the S&P will catch down to the Russell or the Russell will catch up to the S&P. So it depends on on why yields go down. Okay? If if they do, if yields eventually go down because of some benign outcome where it's not really cons a concern about growth, then you would expect the Russell to catch back up to the S&P because the Russell is more dependent on rates than the S&P is, right?

Or at least I shouldn't say that. The Russell is more dependent on rates than the MAG seven in the S&P. the MAG 7 are essentially holding the index up. You could also look at just the equal weight S&P if you prefer that because that one has also been dropping. The the equal weight is is a little bit more rate sensitive than the whole thing because the mega caps that have billions and billions stored away aren't going to be that affected by rates immediately when rates start to drop.

Okay? They're just not. I'm sure some of you watching while you can look on the screen and see that the 10-year yield is at, you know, 5.2%. It probably for some people it doesn't really affect them that much, right? Like they can ignore that in the short term. So the equal weight S&P is has dropped as well, right? And then the Dow Jones has continued to drop. So, it's interesting because in some ways some markets are correcting, but the MAG 7 are not really allowing the the S&P and the NASDAQ to do the same.

So, now we're sort of at a critical moment where we figure out what are yields going to do? We had a soft PCE print, if you want to call it that, and a somewhat soft labor market print. the unemployment rate is not really that soft, but the the non-farm payroll is. So, we had that, but yet yields are still not going down. Even today, there was news out of Europe that they're going to be releasing uh oil, I believe, from some of their reserves to try to get the price of oil down.

But if you look at Brent, it isn't down that much, right? So, then the question is is like what needs to happen? Bessant announced just a day or two ago that they were going to buy back 6 billion um in their bond buyback program. The last time they did something like this, they did four billion I believe back in like midepptember and the market completely shrugged it off and did not care, right? Like it it just didn't care.

So there's this issue where yields are going up but and credit spreads are widening. If you look at credit spreads, this is CCC and lower. Here we have investment grade still relatively low, right? Like it's it it's relatively low. These are not that concerning. It's more like the rate of change if it were to continue could become concerning because you know all these major spikes that correspond to these drops in the S&P, they they start at first by going up and the market doesn't generally care at first.

But if it keeps going up, then the market starts to care. Okay? And that's where you can see these major spikes tend to correspond to drops in the S&P. And then you can look at high yield and that has had a a pretty substantial move up as well, right? Like it's almost back to where it was in in March of 2025 or sorry, March of 2026. And if it continues to move up at this rate, it will be there relatively soon. Now, credit spreads can widen for a number of reasons, right?

Yields going up can make credit spreads widen, like the long ending going up as quickly as it can or as as it is. Also, if there's weakness in the labor market, that could make credit spreads widen. There's a lot of different reasons why credit spreads could widen, but I would say right now this is a a risk to watch. Not necessar not necessarily the canary in the coal mine, right? Like this is this is just simply a risk to watch. says, "Does this continue to to go higher?" And if it does, then at some point, you know, you I would expect the S&P to respond to it.

It wouldn't have to be a major drop. I mean, in February, March, it was literally just like a 5 to 7% drop or something. Um, but this would be something to sort of watch. And if you look at the the move index, right? So the bond market option volatility um estimate index, you can see that that is, you know, has has spiked considerably here. And if you were to overlay the S&P, it's kind of interesting because there's been a major divergence because a lot of times when this thing is spiking, you know, the uh the S&P is dropping.

But I guess this time's different, right? You know, it's been spiking, S&P hasn't dropped. That's sort of what we've seen the last couple years. If you go back before that, there's times where this thing has spiked and the S&P didn't care. Um, but there's plenty of times where it did. You know, you can see a lot of these spikes correspond to drops in the S&P. Um, I'm wondering if we can find one where it spiked and there wasn't really a drop.

A lot of these seem to be around drops. So, we'll see. I mean, it's kind of an interesting setup. And you know, clearly I I had been more on the camp of a of a drop uh of some type of correction by stocks in Q4 and and sort of noting that if you were to look at at say something like the QQQ, which just put in a new all-time high on October 2nd, um I distinctly remember in 2018 that being the same thing, right, where the QQQ put in a new high on October 1st. first and and then it still went down, right?

You can see that this the August high was around 18752 and then this high was 18753. So, I can't I I don't really know unfortunately like what way this is going to break because the the metrics that I would normally sort of rely on like credit spreads and and the long end sort of running higher, those haven't really affected the market in the way that it normally does. And so it the problem is on one hand it would make sense to have that correction in stocks.

But on the other if if the only argument is that you know is just you wait then it leads to having a unfalsifiable thesis. Right? Because you can just keep saying well you know just you wait eventually eventually the market will go down and and and then you'll see. And and maybe that's right right? Maybe that's right. But until we actually start going down on the on the major indices, it's hard, right, to to sort of to to sort of dig my feet into that.

If the market starts moving down, right, like if the QQQ is just like sweeping a prior high before heading down for a little bit or getting close to prior high, then we should see that next week, right? Because I mean, it's we're at a critical moment. either either the Russell is going to catch back up or the QQQ and the S&P are going to catch back down. And if you look, there's there's different examples through history.

You can see back in 2024, the Russell was dropping well before the S&P started to drop. You could argue that the Russell was halfway through its correction before the S&P started to drop. But there are times in history where the Russell does drop and the S&P doesn't always necessarily go down. I think you have to I mean you have to go back a little ways, but I know it I know it has happened. Like I have I have found where it has happened and a lot of times they just go down together, right?

They go down together and they go up together. Um, but when they do sometimes diverge, it's usually that the Russell is is dropping because rates are going up and the larger caps are just able to just shrug it off in the short term because it just doesn't really affect them immediately. So, there's probably a few other charts that that we could look at. Um, if you were to look at at job quits, job quits tend to go up when the economy is they tend to drop when the economy is struggling.

That's actually been relatively flat for a while. So, and if you think about it, the reason it goes down during recessions is because people are less likely to leave their job if they can't find a new one. And you can see that it went down over here a lot. But the point is that this was just getting rid of excess, right? If it were to go down again drastically, that would likely correspond to a recession. Now, speaking of recessions, I obviously have been, you know, on the side of of not calling for it.

And the reason is because it's really, really difficult to call and there's a lot of fake outs where you think there was a recession and then the market's convinced there's a recession and then there's not. And we have a recession risk dashboard that includes employment, national income and product, production and business and interest rates and credit spreads. Um, and if you look at sort of the macro recession summary risk, it's been relatively low, right, since the pandemic.

Okay, one of the metrics tends to shoot up first. And we designed it this way because a lot of them unfortunately they almost require lower asset prices to even start to trigger because you're not going to have large layoffs until after you have lower asset prices. That doesn't mean the this can't help people determine that there is a recession, but it's not going to tell them ahead of time, right? It might tell them after you're already a few months into the recession that who knows how long it could last.

Maybe it only lasts a few months or maybe it lasts one or two years. No one ever knows. But the gauge that has a few false positives because we've allowed it to react quicker is the interest rate risk, right? And the interest rate risk is starting to move back up. Now, again, there are times where you have sort of false moves, right? You can see we had some in in the leadup to 2000. There was also a false one in 1996. you're going to have some false moves, but it's coded to basically say, "Hey, at least have it on your radar, right?

Have it on your radar because this is something to to watch." Now, I've obviously been of the opinion that while you can have corrections in the market, the market will still likely hold on to the highs eventually because we're going into these pretty major IPOs, the Anthropic IPO and the OpenAI IPO. But that doesn't mean you can't have drops in the market. In fact, when we had the SpaceX IPO in um in the summer, the S&P actually did have a correction before the SpaceX IPO, right?

Like I mean, it had like a a 5% drop sort of going into that. So, the reason for that arguably is just because people are are sort of taking money out or not putting as much money in so they can save up for the IPO. Okay. And with SpaceX, I remember going through this with you guys. um quite a bit actually because we we actually did at least one or two videos on SpaceX and basically saying look what normally happens is it rallies at launch and then it gets a big sell-off and then it tries to recover from there.

Okay. So SpaceX long-term probably will do fine. Okay. And I hope it does cuz I I do own some. I did buy some uh back in in sort of the uh the the late summer basically around the the unlocks because I thought, you know, I've seen that story so many times before where on the day of the unlocks, that's where the market bottoms because that's sort of like max fear for a while. Now, it could go back down if, you know, if the stock market starts to show weakness.

I'm not saying it can't, but um this this launched on June 12th and ahead of that launch, the S&P topped on June 2nd, right? So, it topped about 10 days earlier. I believe the anthropic IPO is scheduled for November, but they keep changing it, right? I mean, it it was October, then they changed it to November. I don't know when it's going to be, uh but it is and I don't think the OpenAI IPO is until next year. Um sometime in in 2027.

So, that's where we are. Um, and I would, you know, I I think yields are still the big thing to watch here, especially with the inflation report coming out in in just a couple of weeks. I would remind people that the best course of action, in my opinion, not financial advice, is to have a strategy, an investment strategy, and not overly rely on these macro things. Because what often happens is they don't matter for the longest time. the market doesn't care about them until it's all the market cares about, you know, and we've seen that happen many, many times before where the market will just completely shrug something off for months, if not years at times, and then one day the market wakes up and it's like, "Oh, I all of a sudden care about this." So, I wouldn't use the macro to to figure out, you know, exactly how you're going to invest.

I would try to come up with a different strategy and and take the macro into account as to what you know what you might expect to see happen. You know, I I think the macro last cycle helped us to identify in the cryptocurrency world why you wouldn't see uh a rotation from from Bitcoin to altcoins like a durable rotation. I think the macro helped with that and monetary policy helped with that. But you can still have bull markets with difficult with tighter monetary policy as we saw in 2019 and as we saw in 2023 through 2025.

So it's not impossible uh for those things to happen. It's just something to sort of keep in mind. But that basically covers it I believe. Um I don't really think there was you know there was anything else uh that I I really wanted to cover. Before I go, I will just quickly look through um some of the different things. You know, I I think one argument too that I don't know if it's going to become a thing or not, but with inflation, if they really don't want to raise rates, uh might they consider restarting quantitative tightening because that was started many years ago and to help combat inflation.

And Kevin Walsh is a big proponent of reducing the balance sheet. He's always been like, ever since I've heard of him, he's always been a big proponent of reducing the balance sheet. And so, one of the things they could do to help offset the need for much higher rates would be to just simply start quantitative tightening back up. I know that would not be a popular thing, but it probably wouldn't make the headlines the same way rate increases were have been.

And you can see that, you know, last cycle, last business cycle, they when they ended quantitative tightening, you can see that we sort of bounced off these lows. And then what happened is we don't know what would have happened to the, you know, to the crypto industry to stocks right away, but we had a massive crisis and they just printed a ton of money and the balance sheet of the Fed skyrocketed essentially overnight, right?

I mean, it went from, you know, 3.7 trillion in 2019 to about 9 trillion in 2022. So, we're kind of at that point after QT has ended. But with inflation starting to come back in some ways, I would have to imagine it at least becomes a discussion, like a topic of discussion, right? Like if you're going to if you're going to go through QT during other periods of inflation, why wouldn't you now? And I think if they did, that might take some of the uh the burden off having to raise rates as much.

Right now, the market is not expecting a rate hike in October, right? There's a almost an 80% chance that the Fed holds constant. The Bank of Japan though almost surely will be raising rates in October. And the reason is because if you look at I if you look at um the 2-year yield in Japan, you can see how it has absolutely skyrocketed. And if you were to overlay interest rates into Japan in in Japan, um, and we're going to set those to the same scale, you can see just how far behind the Bank of Japan is, right?

They they need to be raising rates yesterday and they have been raising rates but they really need to raise rates here to get to try to combat inflation cuz inflation if you look at the Tokyo report that just came out it's coming back in Japan and arguably the Bank of Japan is you know it's currently at like 1 1.25%. They're arguably you know two to three 25 basis point rate hikes away from having a chance to cool inflation.

So, I would watch for the bankage pan to raise rates not only in October, but also in in December, whereas the Fed, it seems like they're going to hold off in October. In 2018, they actually did the same thing. They they raised rates in October uh or sorry, they raised rates in September and then they didn't do anything in October and then they raised rates again in December. So, perhaps there is some rhyming going on.

Uh but in 2018, the Bank of Japan wasn't raising rates at all. So, there are some differences this time uh compared to compared to 2018. So, we're going to go ahead and wrap it up there. If you guys like the content, make sure you subscribe, give the video a thumbs up. Uh we also do, if you guys want access to the platform that we've been using here, uh this platform here, you can check out into the cryptoverse.com. We have that sale going on.

Links in the description below. And hopefully I will see you guys at the upcoming investing through the cycles conference in Miami. Main conference day is November 21st. We'll have a few talks on November 20th. Thank you guys for tuning in. I'll see you next time. Bye.