I’m old(ish) and mostly out of touch, so it took me a while to figure out that “ick-yick” isn’t a laugh line ripped from the script of The Beverly Hillbillies but texting shorthand for “If you know, you know.” And FWIW (see, kids, I can play this game...) “IYKYK” takes us part of the way to understanding the interaction between markets and Federal Reserve Chairman Jerome Powell’s statement on Friday, when he told the world that “the time has come for policy to adjust.”¹ (That’s Fedspeak for “get ready, because we’re gonna start cutting rates soon.”) 

The market’s reaction to Powell’s admission that rate cuts were coming soon was about as true to script as Jed Clampett using his homespun knowledge to cleverly upend Mr. Drysdale’s latest scheme to part Jed from his oil money (again, IYKYK): Bonds and stocks both rallied on Friday after Powell’s statement. 

Maybe the easiest way to see how fundamental a change this shift in tone by the Fed was (and how willing the market was to finally internalize it) is by looking at T-bill yields, which tend to be highly sensitive to Fed policy given that they match up with the federal funds rate fairly well as a home for short-term money and are highly liquid to boot. Three-month T-bill yields ended Friday’s session at 5.13% — lower than at any point since last May, when the Fed was still in tightening mode — precisely because markets finally knew, thanks to Powell’s pronouncement from high on a mountaintop in Jackson Hole, that rate cuts were coming. 

So IYKYK is a convenient tool for describing last week’s market moves: If markets knew Powell was serious this time, then investors also knew it might be time to start shifting their views — allowing both risky and low-risk assets to rally in response. In other words, they knew, so they knew – IYKYK comes to Wall Street.

Convenient, yeah, but I’d suggest a slight variation: Let’s try “WICK-yick,” (or “when you know, you know”), instead.

Setting aside for the moment the question of whether someone with more than five decades of experience on planet Earth (who still fondly remembers the days when having a BlackBerry was the epitome of cool) is even allowed to update the texting lexicon, here’s why “wick-yick” makes more sense than “ick-yick”: Friday’s 3-bps drop in T-bill yields, which was not nearly as impressive as three Fridays ago, when T-bill yields dropped 8 bps in response to a much weaker-than-expected July payrolls report. 

So all the way back at the beginning of August, markets seemed to understand that Powell would soon be forced to admit that the time for cuts had arrived, and the labor market’s teetering was the reason. When bond investors knew that, they also knew that as comforting as Friday’s decline was, it paled in comparison to the reaction three Fridays before. 

But there was an important difference between last Friday’s drop in T-bill yields and the one three weeks prior: Back then, lower T-bill yields were accompanied by a sell-off in stocks, not a rally as it was last week. Why the difference? This was most likely due to equity investors still waiting for The Big Guy — Powell — to confirm that the Fed realized what other observers (and the bond market) already knew: The labor market is cooling off fast, and Fed policy has grown too restrictive. With that confirmation firmly in hand following Powell’s speech at Jackson Hole, equities suddenly weren’t quite as worried that the Fed would remain on hold too long as the labor market eroded underneath them. Again, when you know, you know. 

That’s about as good a segue into a review of last week’s catalog of macro data as we’re going to get, so here goes, starting with the labor market. If the time has come for investors to start reorienting themselves to looser Fed policy, it might also be time for the Bureau of Labor Statistics (BLS) to reexamine their estimation methodologies: Turns out that official payroll growth was overstated by a whopping 818,000 jobs for the year ended March 31, 2024.² That knowledge came to us via the BLS Quarterly Census of Employment and Wages (QCEW), in which BLS bean counters incorporate newly updated data into their previous estimates. 

To be fair, estimating how many jobs were created or destroyed in any given month is much harder than it sounds: Not only is the data used to guess at monthly payroll numbers incomplete when the first estimate of non-farm payrolls is released, but initial estimates depend on all sorts of assumptions that can only be known in hindsight (my favorite is the “birth-death adjustment,” which doesn’t reflect, uh, terminal exits from the workforce but instead captures the number of employers that were created or went out of business during the period). But every three months, state unemployment insurance programs provide highly reliable, firm-level data that is then used to update previous estimates. It was the arrival of these more complete estimates that created the surprising — but still mostly “business as usual” — snap-back in payrolls. 

That said, watching more than 800,000 jobs suddenly evaporate from the official numbers doesn’t send a very reassuring message. At a minimum, it suggests that some of the downward momentum recently displayed by the jobs market in the form of weakening cyclical employment, slower digestion of the newly unemployed, and (more recently) a slight uptick in weekly claims might be even more concerning than initially thought because we’re starting further behind the curve than assumed. 

IMHO (here we go with the texting lingo again...), the labor market is almost the whole ball game from here on out: We’ll only know if Powell’s Fed waited too long once the jobs data starts sending a more consistent picture, either to the upside or downside. That could take months, as last Wednesday’s QCEW shocker reminded us. So in the meantime, we’re stuck reading between the lines of various other releases like the Conference Board’s index of leading economic indicators (which is still sending a recession “warning” but again stopped short of declaring that contraction is nearly upon us.)³ 

The same goes for last week’s flash Purchasing Managers’ Index (PMI) data, which again showed a growing divergence between manufacturing (which dropped deeper into contraction) and services (which continue to expand). Again, this is sort of a good-news/bad-news scenario: The continued expansion of the services sector is great because that sector represents the largest portion of U.S. economic activity by far. However, the continued slipping of manufacturing has an ominous feel to it because goods-producing businesses tend to be more sensitive to the ups and downs of the economic cycle than service providers, giving manufacturing a canary-in-the-coalmine character that it might be unwise to ignore. Either way, the growing divergence between these two sectors is another key to understanding what the next few months might bring. 

Here and elsewhere, I’ve made the point that looser Fed policy like that promised by Jerome Powell on Friday is a good thing but also sometimes a case of “be careful what you wish for” (“BCWYWF?”). That’s because it’s often only after things like Fed cuts and a normalization of the yield curve occur that the economy starts to sputter. 

Is that series of events in the process of repeating itself? I guess we’ll know when we know. 

What to watch this week 

It’s a fairly active week on the macro front, with Wednesday’s earnings release from artificial intelligence (AI) standout Nvidia among the most likely candidates to produce market-moving news flow. Nvidia is currently the third-largest component of the Standard & Poor’s (S&P) 500® Index, which gives it enormous power to move markets by virtue of its massive gravity alone. But even more important, the company has become almost synonymous with “artificial intelligence” because its chip designs are equipped to handle the massive processing needs associated with the deployment of complex AI models. The company is expected to report around $0.60 in quarterly earnings on an all-in basis but has shown a tendency to outperform analyst estimates in the past. Anything short of that could be taken as a sign that markets in general — and AI-enabled tech more specifically — have gotten a little ahead of themselves. Any update to guidance offered by executives during the post-earnings conference call will also be closely followed by analysts. 

Meanwhile, Friday’s income-and-outlays report is probably the most important single scheduled event on the calendar. In addition to a thorough accounting of how much consumers are spending and earning, Friday’s release also includes the Personal Consumption Expenditures Price Index (PCEPI), which the Fed prefers as its yardstick for inflation. While inflation is clearly fading as a driver of Fed policy, a surprise here would certainly catch the market’s attention. Also of interest will be the national savings rate, which has stabilized below pre-pandemic levels and serves as an important indicator of consumer health. 

Next on the list are a pair of surveys designed to measure consumer attitudes, including the Conference Board’s consumer confidence report on Tuesday and the University of Michigan’s final read on consumer sentiment on Friday. Of the two, Tuesday’s report might be the one to watch: It includes data comparing the number of consumers who think jobs are “plentiful” to the number of those who consider work “hard to get.” Watch that line item for a view into future labor market trends. 

We’ll also get two more looks at how the nation’s manufacturing sector is coping with ongoing weakness in demand with two more so-called “regional Feds”: The Dallas Fed’s Texas Manufacturing Outlook Survey (TMOS) on Monday and the Richmond Fed’s similarly constructed version on Tuesday. As noted above, manufacturing tends to be more sensitive to overall macro trends than other sectors of the economy, which gives the sector’s continued weakness an ominous feel. Look to these reports — as well as Monday’s durable goods orders release — to provide additional context. 

Further down the list in terms of importance is Thursday’s second estimate of second-quarter gross domestic product (GDP), which is expected to reconfirm the earlier estimate’s 2.8% advance. GDP revisions almost never capture the market’s attention unless they reveal something surprising, but somewhat more interesting will be the first estimate of corporate profits as viewed through the lens of national accounting numbers. While the correlation between GDP profits and actual earnings numbers reported by companies themselves is less than perfect, this view can provide clues about the health of corporate America more broadly (and therefore about the likelihood of things like layoffs and margin compression among individual firms). If you’re bored on Thursday and want to give the GDP data a glance, that’s the line item I’d focus on. 

Under the heading of “not usually relevant but maybe this time...,” watch Thursday’s retail and wholesale inventory releases for any hint that products are sitting on shelves longer than usual. Climbing inventories (and, more specifically, rising inventory-to-sales ratios) are a dead giveaway for economic weakness. So far, inventory data isn’t exactly screaming “recession,” but if the pessimists are right, that could change in the near future. 

Finally, Tuesday will bring two fresh estimates of home prices. With mortgage rates now on the decline, it wouldn’t be unreasonable to expect housing to start to recover (which, if last week’s new home sales data is to be believed, may actually be occurring).⁴ But falling mortgage rates alone probably aren’t enough to return affordability to levels consistent with a broad recovery in housing — we’ll need price growth to cool, too. Tuesday will give us an opportunity to see whether that’s actually the case.