What a crazy day (week), starting August off with a somewhat disastrous NFP report. Private sector jobs are trending down, government payrolls are trending down, while manufacturing and goods-producing jobs actually improved in July despite the recessionary ISM manufacturing report. This is a clue that the manufacturing sector is rebounding, as we have been alluding to, which is something that will likely become relevant for markets in the coming months.

After entering this month with the hope of a “gung-ho summer,” we have clearly shifted from focusing on “disinflation” to focusing on weakness in labor markets. Through our metals shorts and our “flipping” this week, we made it through July with very decent returns.

The problem with a weakening labor market (if it continues) is that it’s often pretty hard to reverse the trend, even if you cut rates aggressively. If the US economy is truly weakening, we’ll have to get used to the volatility of weeks like this going forward. The only bright side to this is that it looks like the 60/40 portfolio might be working again, with the usual bond-to-equity correlation being restored as we speak.

We have observed signs of weakness across our nowcasts on the US economy from mid-July onwards, which are starting to materialize in the labor market now, and there are not a lot of places where the risk/reward is particularly great on the long side except for fixed income, which is outperforming most assets by miles these days.

We managed to flip our books in US rates this week with tremendous results, and despite weak signs from economic data, our long copper short gold bet is actually doing great even on a few days like this. I think this cutting cycle is different on a lot of parameters, not least because ISM to yield correlations have flipped, gold to yield correlations have flipped, and therefore we need to be vigilant in our trading in the coming months.

Chart 1: The labor market is starting to weaken