This episode unpacks the seemingly strong economic data, revealing potential distortions from tariff effects and policy uncertainty that create a challenging landscape for investors navigating market volatility.
NFP Jobs Report Breakdown
- Felix kicks off by dissecting the latest Non-Farm Payroll (NFP) report, a key monthly measure of US job growth excluding farm workers, agricultural employees, and some government staff.
- The headline number of 177k new jobs significantly beat expectations, initially painting a picture of economic strength.
- However, Felix notes the unemployment rate remained relatively flat, and average hourly earnings growth slightly missed forecasts.
- He emphasizes the significant revisions to previous months' data, reminding listeners that such revisions are standard statistical practice as more complete payroll information becomes available, rather than necessarily a political manipulation as was often debated previously.
Unemployment Deep Dive: Permanent Layoffs vs. New Entrants
- Delving deeper into the unemployment figures, Felix highlights a concerning uptick in permanent layoffs, a metric often seen as a leading indicator of potential recessionary pressures if the trend accelerates significantly.
- Conversely, the "new entrant" component, strongly linked to immigration trends under the Biden administration, saw a downtick.
- This shift suggests potential changes in labor market composition, moving away from recent immigration-driven growth, which could have broader economic implications.
Leading Indicators: Transportation Work Week & Anna Wong's Analysis
- Felix points to analysis from Eon Berger showing an increase in the average work week for transportation and warehousing, potentially linked to businesses rushing imports ahead of tariff implementations.
- This suggests unusual economic activity driven by policy anticipation rather than organic demand.
- Quinn introduces analysis from Anna Wong at Bloomberg, who accurately predicted the strong report, arguing that the negative impacts on the labor market from trade uncertainty haven't fully materialized yet.
- Wong anticipates weakness will become more apparent in the next two monthly reports.
- Quinn adds, "if things just haven't progressed on a calendar yet, it's hard to read into it too much in my opinion."
Foreign-Born vs. Native-Born Job Trends & Seasonal Factors
- Quinn discusses the reversal in job growth trends between foreign-born and native-born workers this month, with native jobs ticking up and foreign-born ticking down.
- He notes the strong historical correlation between foreign-born job growth and border encounters, suggesting the recent policy shifts might be impacting these numbers.
- While potentially positive for domestic workers in the short term, Quinn cautions this could mean lower overall growth long-term due to a smaller labor pool.
- He also highlights Anna Wong's point about strong seasonal factors in May/June for sectors like leisure/hospitality, trade/transportation, and construction, which typically boost job numbers during summer months, potentially masking underlying weakness.
Leading Indicators: Hospitality & Logistics Data
- Further supporting the idea of future weakness, Quinn presents data showing New York hospitality sector indicators (like inbound foreign flights) lagging behind previous years.
- Similarly, transportation and logistics data reveal a significant fall-off compared to prior periods.
- This reinforces Anna Wong's view that the recent strong jobs report might be a temporary strength before anticipated headwinds hit, making the next couple of months critical for observing labor market direction.
Fed Expectations & The Economic Data "Mirage"
- Felix observes that the strong jobs report has pushed bond yields higher and reduced expectations for an imminent Fed rate cut, particularly dampening hopes for clear guidance towards a June cut (odds were around 60% pre-report).
- He then introduces his core theme: the "mirage" of positive economic data.
- He points to recent ISM PMI (Purchasing Managers' Index – a survey-based indicator of manufacturing health) prints showing a divergence where 'prices paid' surged while 'new orders' (a more leading component) weakened, suggesting inflation driven by prior activity surges, not current demand.
GDP Analysis: Digging Beneath the Surface
- The recent negative Q1 GDP print initially seemed alarming, but Felix argues for looking past the volatile net exports component, heavily influenced by tariff front-running.
- He notes a significant surge in the investment component of GDP, potentially also linked to businesses accelerating capex before tariffs hit.
- While consumption ticked down slightly, it remained positive.
- Felix highlights the Atlanta Fed's GDPNow tracker already showing a rebound into positive territory for Q2 as the export noise subsides, suggesting underlying components might appear stronger for longer due to these distortions.
- He states, "I think the constellation of all of this I think is going to create a mirage where the economic data is going to be a lot stronger for longer than most expect and that it's going to be a mirage."
Tariff Impacts: Consumption, Revenue, and Global Reactions
- Felix discusses how tariffs directly impact consumers (e.g., higher prices on imported goods) and could significantly alter spending habits, especially given low savings rates.
- Quinn notes the European Union is also considering tariffs on Chinese goods to prevent dumping, highlighting France's "fees on small parcels" as a contrast to the more direct US approach.
- Felix presents data showing a significant year-over-year increase in US tariff revenue collection (around $30 billion), indicating the real economic impact is materializing.
Policy Uncertainty: Trade Deals and Trump's Agenda
- Felix points out the US is signaling a hard line even with allies like Japan, refusing to remove the 10% reciprocal tariff, suggesting baseline tariffs are likely here to stay regardless of specific trade deals.
- Quinn emphasizes understanding the why behind Trump's policies – aiming to rebalance the economy towards labor and away from capital, even if it means lower stock market performance as a byproduct.
- He cautions against market complacency, noting that despite hopes for rollbacks, the administration's core goals (reshoring, supporting the middle class) remain, and deals haven't materialized easily.
- Quinn states, "the whole reason to roll this out is to reshore, to bring jobs back, to lift up the middle class."
Fiscal Policy: Wish Lists vs. Reality
- Felix presents Trump's recently released fiscal "wish list," which includes significant cuts to non-defense discretionary spending (-22%) offset by large increases in defense spending (+13.4%), aiming for a net decrease.
- This signals the administration's core fiscal conservatism remains, despite execution challenges.
- However, Quinn contrasts this with the reality of ongoing high fiscal deficits (around 7% of GDP, typical of recessions, not expansions) and potential resistance or differing priorities within Congress (like the Senate pushing for deficit-increasing bills).
Critiquing Market Narratives: Doge, Budgets, and Timing
- Quinn criticizes the market's tendency to fixate on specific, headline-grabbing issues like tariffs or the "Doge" efficiency initiative, while potentially missing the larger, more impactful shifts happening via standard budget reconciliation processes.
- He argues the real focus should be on the substantial budget cuts being planned through traditional channels, which could be more growth-negative.
- Furthermore, he stresses it's premature to judge the administration's fiscal impact based on recent data, as the current spending reflects budgets set before they could implement their full agenda.
- Quinn asserts, "...to be intellectually honest you can't say well Trump and Doge isn't work you know their priorities aren't working. It's like well this isn't their budget yet."
Treasury QRA and Buybacks Explained
- Felix discusses the Treasury Quarterly Refunding Announcement (QRA), noting coupon issuance (regularly scheduled bond sales) was held constant.
- The focus shifts to Treasury buybacks.
- Felix explains the Treasury has been conducting small-scale buybacks, primarily swapping less liquid older bonds ("off-the-run") for newly issued ones ("on-the-run") to improve market liquidity, keeping the overall duration neutral.
- The QRA indicated the Treasury is evaluating enhancements like increasing purchase amounts, changing frequency, and adjusting eligible securities or counterparties.
Buybacks: Potential Enhancements and Market Impact
- Felix elaborates that potential changes, particularly to "maturity bucket composition," could edge towards a scenario where the Treasury issues short-term bills to buy back long-term bonds.
- While structurally similar to the Fed's "Operation Twist" (designed to lower long-term rates), Treasury buybacks don't change the net amount of debt outstanding, unlike Fed QE (Quantitative Easing – where the central bank creates new money to buy assets).
- Quinn dismisses excessive hype around buybacks, stating they are "rearranging the chips on the table" and won't fundamentally alter the supply/demand dynamics driving yields lower like QE would.
- Felix agrees, seeing buybacks primarily as a tool to reduce left-tail risk (preventing extreme market seizures like March 2020) rather than a driver of lower yields.
Bond Market Analysis: Yields, Sell-Offs, and Plumbing
- Quinn notes that despite recent volatility, long-term yields (like the 30-year) are roughly flat on the year, challenging the narrative of a sustained bond rally.
- He points out that the April bond sell-off, where yields rose alongside falling risk assets (contrary to typical flight-to-safety), wasn't driven by feared catalysts like mass foreign selling or a basis trade unwind, as later data showed foreigners were buyers and futures open interest held up.
- This lack of a clear "clearing event" leaves the market vulnerable.
- Felix adds that key monetary plumbing indicators, like bank reserves and the NY Fed's Reserve Demand Elasticity chart, show no signs of stress, unlike the period preceding the Sept 2019 repo spike.
- This suggests the Fed has no immediate technical need to intervene with liquidity measures like QE.
Long Bonds & Market Structure Challenges
- Quinn remains cautious on long-duration bonds, highlighting the historically flat yield curve still has significant room to steepen (long yields rising relative to short yields) back to normal levels.
- He questions how interest-rate sensitive sectors like housing can recover robustly if yields remain elevated.
- Felix connects this fundamental caution to market structure, noting extremely low liquidity in ES futures (S&P 500 futures contracts).
- This low liquidity environment allows smaller trades to cause large price swings, leading to violent rallies that squeeze bearish positions – a classic bear market characteristic.
Navigating Volatility: Strategy and Risk Management
- Both speakers agree that navigating this environment is difficult.
- Quinn recounts his firm's call to buy the dip in April, anticipating a relief rally, but now advises caution near current market highs.
- He stresses that while a recession might still occur, swift rallies are common in bear markets.
- Felix emphasizes the importance of risk management, reducing position sizes, taking profits, and holding cash rather than trying to perfectly time tops and bottoms in a low-liquidity, high-volatility regime.
- He advises against binary thinking (max bull or max bear), advocating for a spectrum approach to risk exposure.
- Quinn adds, "you just have to be more active or sit it out and say, 'Hey, let's wait till there's certainty and clarity or just buy huge dips.'
MicroStrategy Analysis
- Quinn discusses MicroStrategy's (MSTR) recent earnings and its renewed ATM (At-The-Market) offering, allowing it to issue shares to buy more Bitcoin.
- He notes the high retail interest in stocks like MSTR and the significant premium it often trades at compared to its underlying Bitcoin holdings (Net Asset Value or NAV).
- While MSTR's buying power supports Bitcoin, Quinn suggests the current high premium incentivizes MSTR to issue shares aggressively, potentially pressuring the stock's premium going forward, even if Bitcoin itself performs well.
- He views MSTR's premium as a coincident indicator for Bitcoin sentiment.
Conclusion
- The discussion reveals a complex interplay between potentially misleading economic data, persistent policy uncertainty, and volatile market structure.
- Investors and researchers must look beyond headline numbers, critically assess policy impacts, and employ disciplined risk management to navigate the likely chop ahead.
