In this week's FREE YouTube video, I look at how the economic data could set up a major “pain trade” as evidence mounts that U.S. growth is accelerating despite expectations of weakness. Stronger GDP, rising aggregate payrolls, and a rebound in the Citi Economic Surprise Index point to higher long-term Treasury yields, a stronger dollar, and potential curve steepening going into year-end.
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Defined Terms and Jargon by ChatGPT
Liquidity standpoint – Refers to the availability of cash or easily tradeable assets in the financial system, which often fluctuates at quarter-end as institutions rebalance.
JOLTS data – The Job Openings and Labor Turnover Survey, a monthly report from the Bureau of Labor Statistics that tracks job openings, hires, and separations.
ADP report – A private employment report by payroll processor ADP that provides an estimate of monthly job gains ahead of the official government data.
ISM Manufacturing Index – A monthly survey from the Institute for Supply Management measuring economic activity in the manufacturing sector. A reading below 50 indicates contraction.
ISM Services Index – Similar to the manufacturing index but for the service sector, reflecting business activity, employment, and orders.
BLS Job Report – The official U.S. employment situation report released monthly by the Bureau of Labor Statistics, covering job gains, unemployment, and wages.
Average hourly earnings – A key measure of wage growth included in the jobs report.
Citi Economic Surprise Index – A gauge showing whether economic data releases are coming in stronger or weaker than expectations. A rising index means data is beating forecasts.
Ten-year Treasury rate – The yield on the U.S. 10-year government bond, a benchmark for borrowing costs and economic expectations.
Bear steepener – A yield curve movement where long-term interest rates rise faster than short-term rates, typically due to higher inflation expectations.
Break-even inflation rate – A market measure derived from Treasury Inflation-Protected Securities (TIPS) showing expected inflation over a given horizon.
GDPNow – A real-time GDP forecasting model published by the Atlanta Fed, updated as new economic data comes in.
Nominal GDP – The total value of goods and services produced in the economy without adjusting for inflation.
Aggregate weekly payrolls index – A measure from the jobs report that combines employment, hours, and earnings to track total labor income.
Dollar Index – A measure of the U.S. dollar’s strength relative to a basket of major foreign currencies.
Head and shoulders pattern – A technical analysis chart pattern that often signals a trend reversal, though failed patterns can imply continuation.
RSI (Relative Strength Index) – A momentum indicator in technical analysis that measures the speed and change of price movements.
Bear steepening vs. bull steepening – Bear steepening occurs when long-term yields rise faster than short-term yields; bull steepening happens when short-term yields fall faster.
Fully Edited Transcript by ChatGPT
This week is shaping up to be very important from an economic data perspective, with the potential to set up what could become a major “pain trade” heading into year end. Before addressing that risk, let’s look at the economic developments expected this week.
September 30 marks quarter-end, which often brings liquidity-related shifts. On Tuesday, we’ll see JOLTS data, with expectations at 7.1 million job openings. This number is notoriously difficult to forecast and is subject to significant revisions.
On Wednesday, October 1, the ADP employment report is expected to show 50,000 new jobs. The ISM Manufacturing Index is projected to tick up to 49 from 48.7, while the Prices Paid component is forecast to be roughly flat at 63.8 versus 63.7.
Friday brings ISM Services data, expected to decline to 51.8 from 52. Provided the government avoids a shutdown, we’ll also get the official September jobs report. Expectations are for 50,000 jobs created, up from 22,000 the prior month. The unemployment rate is expected to hold at 4.3%, average hourly earnings at 0.3% month over month and 3.7% year over year, with the average workweek steady at 34.2 hours.
This series of releases makes for a pivotal week. One early indicator worth highlighting is job postings. Indeed postings have been steadily declining, hitting new lows in September, suggesting continued weakness in job openings despite JOLTS’ more volatile readings.
What really sets up the potential pain trade is the Citi Economic Surprise Index, which tracks whether data beats or misses expectations. Since June, the index has trended higher, and over the past couple of weeks, it has risen sharply again. At the same time, the 10-year Treasury yield has moved higher, suggesting the market is recalibrating toward stronger growth. Historically, the 10-year rate tends to follow the Surprise Index closely.
This is important because while sentiment has been focused on weak labor market signals, the Surprise Index and other data suggest the economy may actually be reaccelerating. If so, this implies higher long-term rates and possibly a stronger dollar—moves the market is not positioned for.
GDPNow estimates third-quarter real GDP growth at 3.9%. Adding inflation via the PCE deflator implies nominal growth near 6.2% SAAR, which is very strong. This level is consistent with pre-slowdown growth earlier this year, showing an acceleration back toward the upper end of the range.
The jobs report contains a crucial but often overlooked series: the index of aggregate weekly payrolls. This tracks closely with nominal GDP. In recent months, it pointed to slowing nominal growth around 4.4% year over year, but if growth is indeed reaccelerating, this index should begin turning higher. Rising wages or workweeks would also confirm.
If growth accelerates, long-end rates are too low, which could trigger a bear steepener. Historical examples from the Global Financial Crisis, 2017–2018, and post-COVID show that long-term yields can rise even as the Fed cuts or holds rates, driven by inflation expectations. Current movements in breakeven inflation suggest a similar setup.
The long bond (30-year Treasury) has recently bounced off lows and may be poised to move back toward 5% if inflation expectations rise. The dollar also looks ready to strengthen, with spreads between U.S. and Japanese yields narrowing but the yen failing to appreciate. This either implies skepticism about the BOJ hiking or U.S. rates being too low. Dollar charts show potential bottoms forming against the yen, euro, and Canadian dollar, suggesting broad dollar strength ahead.
For example, USD/CAD shows a triple bottom and possible continuation pattern pointing toward 1.41. The euro has broken down technically, with risk toward 1.14. The yen may move back toward 151. A stronger dollar could also spill into equity volatility, especially if Canadian dollar weakness revives its past correlation with the VIX.
The British pound is also weakening versus the dollar, weighed down by domestic factors. Meanwhile, the U.S. 10-year yield looks to be breaking its recent downtrend, and the curve (10-year minus 2-year) shows early signs of steepening.
All of this points to a potential year-end setup where stronger economic data pushes long-end rates higher, steepens the curve, and strengthens the dollar—precisely the type of pain trade the market is unprepared for.
Disclaimer
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