Leading indicator for "US recession trading" in the next month: Initial jobless claims in the United States at the beginning of the week.

Author: @Web3Mario (_mario)

Abstract: I wrote an analysis article on the market and macroeconomy last Monday, and found that everyone is quite interested in this topic, I myself am a science and engineering major, and I have been engaged in Web3 product design, operation and research and development. It’s not an economics major, but I’m very interested in politics and economics, and I’ve been insisting on self-study. Therefore, I think the reason why everyone can like the content output from my perspective should be more friendly to non-professional enthusiasts, because it will contain some conceptual explanations, most of which are the problems I encountered in the learning process, and I think it is necessary to explain them in detail to friends like me. In the future, I will insist on outputting some content on related topics to learn and communicate with you. Back to the topic, I saw such a point of view in the comments of friends in the previous article, which probably means that this kind of analysis article is basically hindsight, indeed, this is the analysis and prospect of the results, I think this kind of review is still necessary, it is a part of learning and improvement, but I also hope to bring you some forward-looking analysis content, so in this article we will talk about a macro indicator that suddenly becomes very important in the next month, which should affect the macro indicators of short-term risk asset PA to a certain extent, United States jobless claims at the beginning of the week. This is the most intuitive differential indicator for the “United States recession trade”.

A brief review of the current market situation: The wave of closing Japanese yen arbitrage trades is gradually subsiding, and the US recession trade is taking over

First, let’s briefly review the current state of the market. In general, the Japanese yen Arbitrage trade to Close Position is basically coming to an end. The market’s concerns have shifted from the uncertainty of Japan’s Central Bank’s interest rate hike to concerns about the United States’ hard landing, which is known as the “US recession trade”.

In the previous article, we have pointed out that the main reason for the massive Fluctuation in the market on Monday was the aggressive rate hike by the Central Bank of Japan. I also mentioned that in the US-Japan alliance, Japan, due to its lack of complete financial sovereignty, usually plays a cooperative role. Therefore, this round of Close Position trading frenzy accompanied by a news conference held by Masayoshi Amamiya, Deputy Governor of the Central Bank of Japan, at 9:30 a.m. on Wednesday, August 7th, Beijing time, announced the conclusion. He made detailed comments on the rapid pump of the yen, the big dump in the stock market, and the future direction of the Central Bank’s monetary policy. The core includes three points:

• The recent Fluctuation in the stock market and foreign exchange market has caused an impact. If the market Fluctuation affects the outlook, the path of Intrerest Rate will change.
• The Central Bank of Japan will not raise interest rates when the market is unstable, and currently needs to firmly implement loose monetary policy.
• If the outlook becomes a reality, the loosening degree will be adjusted, Intrerest Rate is not lagging behind the situation, and is urgently following the market’s impact on the economy.

At this point, it can be said that the Japanese Central Bank has temporarily capitulated to the market, which means that it will not raise interest rates without affecting the risk market prices. It may even continue to implement loose policies. This means that there is still room for Japanese yen arbitrage trading with the assurance of the Japanese Central Bank, and this investment portfolio is equivalent to hedging the risk of the yen exchange rate with the help of the government. Therefore, we can see that after Uchida’s speech, the yen quickly pulled back against the US dollar exchange rate, dropping sharply to 146. Of course, the Nikkei index and Japanese government bonds have also experienced corresponding corrections. It can be said that the short-term liquidation wave of yen arbitrage trading triggered by the aggressive interest rate hike of the Japanese Central Bank has ended, and the market is no longer overly panicked about the future aggressive interest rate hikes by the Japanese Central Bank.

But to make a simple projection here, the Japanese Central Bank’s interest rate path in the medium to long term has basically been confirmed, just that this contradiction has been transformed from a short-term contradiction to a medium- to long-term contradiction. The reason is simple too. Let’s take a look at Japan’s current inflation rate, which has already reached 2.8%. Considering that the yield of short-term Japanese government bonds is currently only beginning to pump and is at a relatively low level, the real Intrerest Rate in Japanese society is still in a negative Intrerest Rate state. This means that the loose monetary environment in Japan will further push up the inflation level. Considering that the current inflation level has already exceeded a globally recognized target level of 2%, and Japan’s wages are basically rising at a level lower than the inflation rise, with some of Japan’s traditional pillar industries such as automobiles facing strong challenges from countries like China, the job market is not very optimistic. Therefore, the inflation pressure at this time will cause Japan’s misery index to rise, and the Japanese people will be under pressure. Therefore, raising interest rates is basically the only choice for the Japanese Central Bank, but for the sake of global financial stability, it is still necessary to endure some hardships for the people.

At this point, the focus of market trading has shifted to the second market, which is the so-called “US recession” trade. So where does this concern come from? It can be traced back to two macroeconomic data released by the US on August 2nd: July non-farm employment data and July unemployment rate. First, the non-farm data was far below expectations, and secondly, the July unemployment rate reached 4.3%, triggering a judgment index used to measure whether a country has entered the early stage of an economic recession cycle, the Sam rule.

Here is a brief introduction to how the Sahm Rule recession indicator is calculated, proposed by economist Claudia Sahm of the Federal Reserve. Sahm found that when the 3-month moving average of the U.S. unemployment rate minus the previous year’s low point in the unemployment rate exceeds 0.5%, it indicates that the economy is in a recession phase. In the past, each recession phase has met this condition, so this indicator is named the Sahm Rule recession indicator. The U.S. July unemployment rate just brought the Sahm Rule indicator to 0.53%, officially entering its recession period, which has raised some concerns in the market.

Of course, we saw that after the goal was reached, the validity of the Sam rule began to be widely discussed by bigwigs, including Nomura and other institutions, and even the “Sam Rule” proposer, Claudia Sahm said in an interview on August 6 that considering the changes in the United States job market today, the failure of the Sam rule does not prove that the United States economy has fallen into recession. Regardless of this, this also shows that this indicator has caused a lot of followers in the market. Especially for some large capital, risk is more critical than return, so it is very normal to make a more cautious adjustment to the market at this time. This means that the observation of whether United States is in a recession will continue and become more critical for some time to come, which leads to the topic of this article, the leading indicator of the “United States recession trade” in the coming month: the number of people receiving unemployment benefits at the beginning of the United States week.

The number of initial jobless claims in the United States at the beginning of the week will become an important indicator for future recession differential assessment within the next month

Why has this indicator become very important? This stems from an interpretation of the high unemployment rate in July. Some people believe that the reason for the poor employment data in July was due to the impact of Hurricane Beril, which lasted from June 28, 2024 to July 9, 2024. Objective factors such as infrastructure damage caused short-term fluctuations in the job market. Therefore, the poor employment data in July is not representative, so the employment data in August is particularly critical, because the employment data in August determines whether this argument can be broken.

However, considering the release date of US macroeconomic data, the August non-farm payrolls and unemployment rate will not be made public until the first Friday of September, which is September 6th. Therefore, during this month, the market needs to find some other evidence to predict the results of September in advance. The most crucial evidence among these is the number of initial jobless claims in the US at the beginning of the week, and of course, we also need to follow the speeches of some Fed officials.

The reason it is necessary to remind everyone of the importance of follow is that the indicator has not been particularly important in the past, but because the market has mainly been engaged in recessionary trading recently, and the initial claims for unemployment benefits at the beginning of the week can be observed as a differential data of the monthly unemployment rate. Generally, the people who initially claim unemployment benefits mean first-time unemployment, so it can well reflect the changes in the employment market this month.

The indicator is released at 8:30 p.m. Beijing time every Thursday. A specific observation criterion is that when the public data is lower than expected, it indicates that the employment market remains strong this week, the probability of recession decreases, and the risk asset market is more likely to pump. When the data is higher than expected, it means that more people are starting to become unemployed this week, the probability of recession will increase, and the risk asset market is more likely to fall.

Of course, in this stage, the investment strategy still needs to be relatively conservative, and controlling leverage is the most important. Increase the investment after the market gives clearer trend signals. After all, making money is a long-term thing and there is no need to rush. Finally, I hope everyone can follow my Twitter, Web3Mario. I recently opened a personal public account, Ma Xiaoao looks at Web3, and I also ask everyone to follow more. Thank you.