The US labour market isn’t cooling | USAEMALL.com

Good morning. Yields are up and prices are down on government bonds across the developed world. US Treasuries yields crossed 4.7 per cent on Friday, alongside big increases in Germany, Japan, and the UK — which saw 30-year gilts hit a 27-year high last week. Policy uncertainty? Higher neutral rates taking hold? Fiscal vigilantism? Inflation fears? All of the above? Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

Jobs

Friday’s jobs report, Unhedged readers will know by now, was very strong. It is important to note, though, that while the report was indeed a blowout relative to expectations — 256,000 jobs added against an estimate of 160,000 — it did not represent a breakout in the level of or trend in employment. Instead, what we got was confirmation that the labour market remains firm, reflecting an unusually strong economy that is cooling very gently, if at all. 

Using three and six month averages to remove a bit of the noise, it looks like job growth may have edged up a bit in recent months, but the improvement does not look very different from the normal variability we’ve seen in the data in the past couple of years. Could we be seeing a re-acceleration? Maybe, maybe not. 

Some worrisome sub-trends of the past few months, which had been indicating cyclical weakness, do seem to have reversed: the ranks of the permanently unemployed and part-time workers who want full-time work have both fallen. In the household survey, unemployment edged down. But, again, what we see is confirmation of a strong and stable trend rather than a changing one. 

The market, however, had expected cooling — or at any rate, had wanted it. Its response was classic good-news-is-bad-news. Bond yields rose, even more at the short end than the long end (“bear flattening” of the yield curve, a notable shift from recent steepening). Break-even inflation edged up. Stocks, especially small caps, didn’t like it at all. 

Bank of America made some news by being the first of the big banks (that we know of) to come out and say there would be no rate cuts this year, and saying that the real question is whether the Fed will have to raise rates. Unhedged agrees. BofA economist Aditya Bhave wrote that “hikes will probably be in play if year-over-year core PCE inflation exceeds 3 per cent”. We’d go further: if we see 3 per cent again, we will get a rate increase.

Where is inflation, then? Here’s the core inflation chart we published after the last CPI inflation report, a month ago:

The trend is at best sideways, and at worst turning up. But, as we wrote then, items with volatile prices have contributed quite a bit to the recent heat, and the Fed’s bugbear, housing inflation, is finally cooling some. Our guess is that inflation is not getting worse, but it’s above the Fed’s target and doesn’t seem to be getting better. 

A couple of pundits have seen a sign that inflation is heating up in the strong ISM services survey for December. The “prices paid” portion of the survey jumped. Torsten Slok of Apollo argues that this is a leading indicator for personal consumption expenditures inflation. His chart:

We don’t quite buy this yet. The prices paid series is noisy. That said, we’ll be holding our breath on Wednesday morning, when the consumer price index reading for December lands.

Readers reply on stablecoins

We got plenty of thoughtful responses to our questions about stablecoins. Several readers thought we underplayed the usefulness of stablecoins as an alternative to a clunky banking system. One reader wrote that 

…with the increasing adoption of Bitcoin by traditional financial institutions, it’s true that stablecoins may not be as essential for certain users, particularly wealthier individuals. However, this shift coincides with growing regulatory restrictions in the banking sector. Limits on withdrawals, wire transfer delays, and enhanced disclosure requirements have introduced new friction points for banking customers. In this context, stablecoins provide a valuable alternative by allowing users to store, transfer, and transact funds 24/7 without relying on traditional banks or incurring their associated fees.

It’s not clear to us that the limits, requirements, and processing times at banks have gotten much worse in the past few years. Furthermore, these kinds of restrictions exist for a reason — to stop crime.

Other readers did highlight the use of coins like Tether’s USDT for crime. From Nick Merrill, director of the Daylight Lab at the University of California, Berkeley, which studies cybersecurity:

USDT has been a favourite in ‘pig-butchering’ scams (essentially, high-touch, long-timescale fraud that frequently relies on slave labour). Cartels also like it. Criminals like USDT because (1) it doesn’t touch any regulated financial institutions, unlike Circle’s USDC, and (2) the exchange rate is more stable, which (presumably) helps their cash flow — they have to get clean fiat currency to provide liquidity, which has a cost, and if the other side of that transaction is something volatile (like bitcoin), they could get run over.

Some readers praised stablecoins’ potential to reinvent global finance by ushering unbanked households in emerging markets into the global financial ecosystem. An example:

Stablecoins also play a critical role in developing regions where access to traditional financial services is limited. In many poorer countries, a significant portion of the population remains unbanked but has access to smartphones. For these individuals, stablecoins can serve as the only viable financial alternative . . . This capability is particularly important for remittances, savings, and commerce, offering a lifeline to those in areas with weak or inaccessible financial infrastructure.

We doubt it. As it stands, to buy a stablecoin, one still needs some form of interaction with the conventional financial system. And unless grocery stores, doctors, and other vendors accept stablecoins as payment — which would seem particularly unlikely in developing countries — people would still need to convert their stablecoins into fiat currencies via conventional banking to actually use them. 

On trading, which was more the crux of our question, many pointed out that stablecoins provide the benefit of all-day trading, as opposed to fiat exchanges that close at night and on the weekends. Benedict Roth, chief risk officer at a crypto exchange in Singapore, wrote us:

These instruments trade 24 hours/day, seven days/week, with settlement finality in a matter of minutes and real-time margining. [US dollar] fiat currency, in contrast, settles only five days/week during US business hours and settlement finality, for wholesale market participants, might not be achieved until the next working day.

If you are speculating on cryptocurrencies 24/7, or perhaps based in an inconvenient time zone, by all means use stablecoin. We like our weekends.

We received a helpful correction from one reader, who pointed out that some “crypto exchanges currently do pass on yield for your stablecoins (for example Coinbase is offering 4.1 per cent),” if those stablecoins are sitting in a user’s wallet on the exchange. Our apologies — though we will note that Coinbase only does this for more compliant coins like USDC, not Tether’s USDT.

But, judging by the responses, our main point still stands: as crypto becomes more “conventional”, we think that the use case for stablecoins as a trading intermediary will shrink. Big asset managers like BlackRock and Franklin Templeton have recently rolled out on-chain money market funds, which allow users to park reserve-backed cash on the blockchain while still getting the yield — rather than Tether or another stablecoin issuer harvesting that yield. And, at least in the case of BlackRock, users are issued on-chain securities, similar to a stablecoin, that are backed by the money manager.

The push to legitimise and integrate cryptocurrency won’t kill stablecoins. But they will not get the same benefit other cryptocurrencies will.

(Reiter)

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A bubble can be the result of policy.

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