Happy Sunday all.
I hope you are all enjoying the summer. My summer has involved booting around the baseball diamonds of Ontario with my sons’ team and watching my Blue Jays put up an exceptional period of play.
“Lies, Damn Lies and Statistics” is a quote often attributed to Mark Twain but has been used by many others over the past 125 years. For me it is a reference to my favourite TV show of all time, The West Wing. In season 1, there is an episode entitled “Lies, Damn Lies and Statistics”, focused on opinion polling for President Bartlett. The idea being, that statistics can often be presented in many different forms to provide very different narratives.
Shooting the Messenger
Last week President Trump fired Erika McEntrafer, the Commissioner for the Bureau of Labour Statistics (“BLS”) after the group published a low job growth report for July. In fact, not only was the reported job growth for July weak but the estimates for both May and June were revised downwards.
The market reaction was for equities to sell-off, U.S. Treasury bond yields to decrease and for gold to outperform. Why did the market react this way?
The market took these weakened job growth numbers as a sign that 1) the economy is cooling and 2) rate cuts could be used to help support labour markets. On the day, global equities sold off while the yields on U.S. Treasury bonds, particularly the shorter rated (therefore more sensitive to rate policy), dropped dramatically. Gold also performed well as the markets expectations for real interest rates (interest rates minus inflation) declined, leading to support for gold as an alternative store of value.
Dual Mandate
Central bankers sit in an uncomfortable position usually juggling multiple mandates. In most cases, they are trying to create Goldilocks like conditions, with economies (porridge) that isn’t too hot and isn’t too cold. Hot economies create inflation while cold economies lead to job losses. However, those goals are often in conflict as rate cuts usually lead to increasing borrowing, therefore spending and higher inflation, where as rate hikes usually lead to a slowdown in credit expansion, therefore reduced spending and increased unemployment.
Recently the focus has been on the Chairman of the Federal Reserve (Jerome Powell) to cut interest rates, however, there hasn’t been sufficient data to suggest there is any urgency. To quote Powell, from his press conference on July 30th:
“In the labor market, conditions have remained solid. Payroll job gains averaged 150 thousand per month over the past three months. The unemployment rate, at 4.1 percent, remains low and has stayed in a narrow range over the past year. Wage growth has continued to moderate while still outpacing inflation.”
While inflation has moderated, job growth looked robust and therefore there was little indication that interest rates needed to be cut. However, just two days later the BLS data suggested otherwise. Hence, the market reaction to the expectations for rate cuts in September (the next Federal Reserve meeting) and beyond.
Where Do We Go From Here?
Jerome Powell’s term as Chairman will be up in May 2026. Does the recent job weakness give him enough coverage to cut rates in September? Will the recent changes to the Board put additional pressure on cutting rates? Will the impact of tariffs pass through to higher inflation before interest rates are cut?
The stats will be there to support which ever side is selected. President Trump may not have the patience for the calculators but to end on a Yogi Bera quote:
“I never blame myself when I’m not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn’t my fault that I’m not hitting, how can I get mad at myself?”
