LEAKED: Interest Rate Cuts Are Coming?!

Summary

The video script discusses the growing concern over rising unemployment rates and the potential for a recession in the US, as indicated by the S rule. It highlights the shift in public perception from a strong labor market to one signaling economic weakness. The script also addresses the possibility of the Federal Reserve cutting interest rates in response to these economic indicators, despite previous assurances of a resilient economy. The analysis includes the significance of the 5-year to 10-year yield curve spread and its implications for the broader economy.

Takeaways

• 📉 The US payroll report has led to widespread discussions about interest rate cuts and increased recession risks, shifting perceptions from 'strong and resilient' to concern quickly.
• 📈 The unemployment rate, rather than the headline payroll number, is now the focus as it is rising globally, including in the US, indicating potential economic weakness.
• 💡 Major bank strategists anticipate eight consecutive interest rate cuts from the Federal Reserve starting in September, reflecting growing concerns about a recession.
• 🕵️‍♂️ The 'S rule', created by economist Claudia Sahm, is gaining attention as it uses the unemployment rate to signal a recession when it rises significantly from its low, and is currently nearing its threshold.
• 🗣️ Despite Chairman Powell's assurances of a 'soft landing', his recent testimony to Congress suggests a more cautious stance, acknowledging the labor market's cooling.
• 📊 The unemployment rate's increase from its record low of 3.4% last April to 4.1% in June is being closely watched as a significant economic indicator.
• 🚨 The 'S rule' is not a forecasting tool but a coincident indicator, suggesting that by the time it triggers, the recession may already be well underway.
• 📉 The 5-year to 10-year treasury yield spread, which has been inverted more often than not recently, is starting to un-invert, signaling potential changes in the bond market and economy.
• 📉 The inversion and subsequent un-inversion of the 5-year to 10-year yield spread have historically preceded economic downturns, suggesting that the current move could be a warning sign.
• 🏦 Wall Street strategists and economists are increasingly acknowledging the weakening labor market and economy, with some predicting significant interest rate cuts by the Federal Reserve.
• 🌐 The global economic context, with many economies already in recession, suggests that the US may not be immune to a downturn, despite previous optimism.

Q & A

What is the main focus of the discussion in the video script?

The main focus of the discussion is the recent shift in economic sentiment from optimism to concern over recession risks, driven by changes in the unemployment rate and the potential for interest rate cuts by the Federal Reserve.

Why has the unemployment rate become a central topic in economic discussions?

The unemployment rate has become central because it is rising in many parts of the world, including the developed nations, and it is considered a more reliable indicator of economic health than the headline payroll numbers.

What does the script suggest about the current state of the US labor market?

The script suggests that the US labor market, once considered strong and resilient, is showing signs of weakness, with rising unemployment and potential implications for economic policy and interest rates.

What is the significance of the 'S Rule' mentioned in the script?

The 'S Rule' is a recession indicator created by economist Claudia Sahm, which suggests that if the three-month average of the unemployment rate is half a percentage point above its 12-month low, the economy is likely in a recession.

How does the script describe the Federal Reserve's current stance on interest rates?

The script describes the Federal Reserve's stance as gradually shifting towards a more cautious approach, with increasing expectations for rate cuts and Chairman Powell starting to hedge his bets on the strength of the economy.

What is the connection between the unemployment rate and the yield curve mentioned in the script?

The script suggests that changes in the unemployment rate can influence the shape of the yield curve, particularly the 5-year to 10-year spread, which can be an early indicator of economic conditions and potential recessions.

What does the script imply about the effectiveness of interest rate cuts in stimulating the economy?

The script implies that interest rate cuts may not be as effective in stimulating the economy as they are often portrayed, and that the focus on the unemployment rate and yield curve is more indicative of the economy's health.

What is the significance of the '5-year to 10-year spread' on the yield curve?

The '5-year to 10-year spread' is significant because it can signal changes in the bond market and the economy. An inversion of this spread has historically been a warning sign of an impending recession.

How does the script characterize the current economic situation in comparison to past recessions?

The script characterizes the current economic situation as being in a similar position to past recessions, with rising unemployment and yield curve movements that have historically preceded economic downturns.

What is the role of mainstream financial journalism in the context of the script's discussion?

The script suggests that mainstream financial journalism may not always provide a clear or accurate picture of economic conditions, which is why alternative sources of information, like Eurodollar University, offer deeper insights and analysis.

What actions are being suggested for investors or observers of the economy in light of the current situation?

The script suggests that investors and observers should pay close attention to indicators like the unemployment rate and the yield curve, and consider the potential implications of these indicators for their financial decisions.

Outlines

00:00

📉 Economic Uncertainty and Rising Unemployment Concerns

The script discusses the shift in public perception from a strong economy to one facing potential recession, triggered by a rising unemployment rate rather than the previously reassuring payroll numbers. It highlights the increased talk of interest rate cuts and the focus on the unemployment rate as a more reliable indicator of economic health. The Federal Reserve's strategy is questioned, with some expecting eight consecutive rate cuts starting in September. The script also mentions the S rule, which has started to flash warnings due to the unemployment rate's movement, and the treasury market's potential signals of economic distress. Despite Chairman Powell's assurances of a soft landing, there's an undercurrent of concern as he begins to hedge his bets.

05:00

📈 The S Rule: A Coincident Indicator of Recession

This paragraph delves into the S rule, formulated by economist Claudia Sahm, which identifies a recession when the three-month average of the unemployment rate is half a percentage point above its 12-month low. The June numbers indicate the U.S. is nearing this threshold, causing concern on Wall Street. The S rule is not a forecasting tool but a coincident indicator, meaning it confirms the start of a recession after it has already begun. Historical data show that the rule has lagged behind the actual start of recessions, but its current position is raising eyebrows among economists and strategists, who are now factoring in the possibility of Fed rate cuts in response to economic weakness.

10:02

📉 Yield Curve Signals and Economic Activity

The paragraph discusses the significance of the 5-year to 10-year yield curve spread as an economic indicator, noting its inversions as a potential warning sign of economic downturns. The spread has been inverted more often than not in recent years, and its recent movements are being closely watched for signs of a full bull steepening, which could indicate an impending recession. The paragraph also mentions the importance of the unemployment rate as a key economic indicator, with its rise suggesting a weakening labor market. Analysts are calling for a more aggressive stance from the Federal Reserve in cutting rates to counteract these economic signals.

15:04

🚨 The Unemployment Rate as a Key Economic Indicator

The final paragraph emphasizes the importance of the unemployment rate as the most charitable view of the labor market, and its rise as a significant signal of economic weakness. It discusses how this indicator, once dismissed, is now commanding attention from Wall Street strategists and policymakers, including Fed Chairman Powell. The paragraph also touches on the potential implications of the 5-year to 10-year yield curve spread for the broader economy and the possibility of a full bull steepening as a timing and confirmation signal for a recession. The speaker concludes by reiterating the need to monitor these indicators closely as the economy may not be as strong and resilient as previously believed.

Keywords

💡Interest Rate Cuts

Interest rate cuts refer to the lowering of interest rates by a central bank, such as the Federal Reserve (FED), to stimulate economic activity. In the video's context, there is a heightened expectation for rate cuts due to increased recession risk and a shift in perception from a 'strong and resilient' economy to one that requires monetary easing. The script mentions a major bank strategist team expecting eight consecutive rate cuts starting in September.

💡Recession Risk

Recession risk denotes the likelihood of an economic downturn or contraction. The video discusses how the payroll report in the US has led to widespread discussions about recession risk, with the unemployment rate becoming a focal point for concerns. The script indicates that the unemployment rate's rise is a significant warning sign of potential economic weakness.

💡Unemployment Rate

The unemployment rate is the percentage of the labor force that is without jobs and actively seeking work. The video emphasizes its importance as an indicator of economic health, with its rise signaling potential economic trouble. The script notes that the unemployment rate has moved from a historically low 3.4% to 4.1%, which has garnered attention and concern among economists and policymakers.

💡S Rule

The S Rule, created by economist Claudia Sahm, is a recession indicator based on changes in the unemployment rate. When the three-month average of the unemployment rate is half a percentage point above its 12-month low, it suggests the economy is in recession. The video discusses how the S Rule is being closely watched as the unemployment rate has risen, nearing the threshold that would trigger a recession signal according to this rule.

💡Yield Curve

The yield curve is a graphical representation of the interest rates on debt for a range of maturities, with the 5-year and 10-year parts being particularly significant for long-term economic indicators. The video mentions the inversion and subsequent un-inversion (bull steepening) of the 5-year to 10-year spread as a potential signal of economic changes, with the current movement being closely monitored for signs of a broader economic trend.

💡Economic Indicators

Economic indicators are statistics that inform about economic activity and conditions. In the video, various indicators such as the unemployment rate, the S Rule, and the yield curve are discussed as signals of the economy's health. The script highlights how a broad set of these indicators suggests the economy may not be as strong as previously thought.

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses the FED's efforts to lower inflation and the potential risks of reducing policy restraint too late or too little, which could weaken economic activity and employment.

💡Labor Market

The labor market encompasses all aspects of the employment relationship, including the demand for and supply of labor. The video's theme revolves around the changing perceptions of the labor market's strength, with the unemployment rate's rise indicating potential softening or weakness. The script notes that the labor market conditions have returned to pre-pandemic levels, which are strong but not overheated.

💡Monetary Policy

Monetary policy involves the actions of a central bank, such as the FED, aimed at influencing the economy through changes in interest rates and money supply. The video discusses how the FED's potential interest rate cuts are a form of monetary policy adjustment in response to perceived economic weakness and the need to stimulate the economy.

💡Economic Activity

Economic activity refers to the production of goods and services in an economy. The video mentions the risk of a sharper weakening of economic activity due to rising unemployment and other indicators pointing to a slowdown. The script suggests that the FED is starting to acknowledge these signs of economic softening.

💡Eurodollar University

Eurodollar University appears to be a platform or service offering memberships and subscriptions for in-depth analysis and education on financial concepts, including those discussed in the video. The script promotes an anniversary sale for this service, indicating it provides comprehensive content on money, financial concepts, and macroeconomic trends.

Highlights

Interest rate cuts and heightened recession risk are now major topics of discussion following the US payroll report.

The unemployment rate is gaining more attention than the headline payroll number, indicating a shift in economic perception.

Expectations for lower interest rates are increasing alongside rising unemployment rates in the developed world.

A major bank strategist predicts eight consecutive rate cuts from the Federal Reserve starting in September.

The S rule, created by economist Claudia Sahm, is being widely discussed as a recession indicator.

The S rule suggests the US economy may be in a recession, with the unemployment rate moving significantly from its low.

Jerome Powell, Chairman of the Federal Reserve, is hedging his bets on the economy's strength amid labor market softening.

The labor market conditions are returning to pre-pandemic levels, indicating a potential economic slowdown.

The unemployment rate's rise to 4.1% in June is a significant move from its previous low, causing concern.

The S rule's calculation is close to triggering a recession signal, intensifying economic concerns.

Claudia Sahm's rule has generated increasing talk on Wall Street about the labor market's cracks.

Economists are speculating about the Federal Reserve's potential rate cuts in response to economic weakness.

The 5-year to 10-year yield curve spread is an important indicator of economic conditions and has been inverting on and off.

The yield curve's 5-year to 10-year spread has recently shown signs of bull steepening, which could signal economic changes.

The potential full bull steepening of the yield curve could be a timing and confirmation signal of economic conditions.

Wall Street strategists and the Federal Reserve are paying close attention to the unemployment rate as a key economic indicator.

The transcript suggests that the US economy may not be as strong and resilient as previously believed.

Transcripts

after last week's payroll report in the

US everyone is now talking interest rate

Cuts in heightened recession risk

suddenly they're everywhere we went from

strong and resilient to uhoh in a hurry

and it's not because of the headline

payrolling number more and more people

are realizing that one is faulty and

unreliable instead the unemployment rate

has grabbed the world's attention that's

because as I talked about in the recent

video unemployment is rising throughout

much of the world and a majority of the

developed world the United States as I

said in it is not immune so we're

hearing increasing references and

expectations for lower interest rates

along with that higher unemployment one

major Bank strategist team just came out

with expectations for eight consecutive

rate cuts out of the FED starting in

September basically the recession

scenario is becoming much more difficult

to laugh off under the cover of a strong

and resilient labor market that hardly

any One Believes anymore that's why

you're probably hearing an explosion of

references to something called the S

rule the unemployment rate has moved

high enough already it is triggering all

the unnecessarily complicated

economistic measures into flashing major

warnings too and there's another

potential major warning this one's

starting to develop in the treasury

market a possible

uninversity against all of that J Powell

is right now in front of Congress

telling the politicians he's got it all

covered the soft Landing is in the bag

nothing more than just a little slowdown

yet even he too is starting to hedge his

bets a little and sounding a little bit

more doish than he had in the past he'll

still still stay strong and resilient

but underneath his breath you can hear

the hedging going on in the labor market

a broad set of indicators suggests that

conditions have returned to about where

they stood on the eve of the pandemic

strong but not overheated the

unemployment rate has moved higher but

was still low uh was still at a low

level of 4.1% in

June and it's at a a low level of 4.1%

historically speaking but that's not

important and he knows it it's not the

level that matters here it's not the

level that's gotten everyone's attention

it is the move from the low last year it

had been much lower 3.4% last April

which was a 50 plus year row 50 plus

year low that everyone talked about

incessantly and the unemployment rate is

the best view of the labor market it

discounts all of those who fall out of

the labor force so if the most

charitable view of the labor market

suddenly becomes a lot less charitable

that's something to pay attention to and

Powell is indeed doing that as he also

told Congress at the same time in light

of the progress we've made both in

lowering inflation and in cooling the

labor market over the past two years

elevated

inflation is not the only risk we Face

reducing policy restraint too late or

too little could unduly weaken economic

activity and employment setting aside

the idea that interest rates have any

power to influence any of these things

what he's basically saying is yeah we're

getting a little uncomfortable because

we're seeing the softening in the labor

market and we are indeed beginning to

wonder if we've got this consumer price

thing under controler we're confident

about it at least according to our

definition of how things go and maybe we

need to start look paying more and more

attention to what's happening over here

with that unemployment yes it's low and

I'm going to say it's low because that

makes it sound sound benign but it has

moved up substantially to the point that

everyone is now talking about

unemployment and as I mentioned before

in the context of rising unemployment

around the world this is not something

that people can just casually dismiss

any longer as they have been doing all

this time really going back to September

and October when everything really

started to change but to get behind all

of this unnecessary noise or what passes

for mainstream Financial journalism

that's why Euro doll university offers

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University the PM rule suddenly we get

mainstream articles all over the place

Bloomberg CNBC Reuters all of them

talking about the S rule in fact CNBC is

I'll talk about in just a moment got

Claudia s on the on the the channel to

talk about what's happening in the labor

market what is the S rule it was created

by an economist by the name of Claudia s

in 2019 and basically it's a simple

mathematical creation when the 3month

average of the unemployment rate is half

a percentage point above its 12-month

low the economy is in recession it is

basically a coincident recession signal

and as of the latest month the June

numbers that just came out last Friday

the sum calculation was 0.4 three so

just 710 of a percentage point below

what would trigger this s Som rule

ruling that we're in a recession but

we've been in a recession at least in

the danger zone at least according to

this one mathematical calculation going

back to last October it hasn't moved

above the half percentage point that

usually is the triggered threshold or

what everybody accepts as the trigger

threshold but being just below it and

moving creeping a little bit higher

along the way that that's what's got

everyone's attention everyone is

starting to see that the unemployment

rate is signaling something substantial

here that's not strong and resilient the

labor market may actually have cracked

and this is not a forecasting tool

either by the way this is as I said a

coincident indicator it tells you once

recession has already begun not that one

is coming that it has already

started if you go back in time using the

Som rule numbers and the calculations

there by the time you get half a half a

percentage point on a three-month

average that's above its 12-month low

you're deep into recession already go

back to the the great not recession the

S rule didn't get triggered half a

percentage Point uh until April of 2008

already five months into recession the

NBR would later in December 2008 date

the start of the recession in December

2007 so by the time the Som rule got to

the half percentage point above the

12-month low on the average 3mon basis

it was we were already past bare Sterns

and the the first half of the great knot

recession was well underway by that the

cycle before that in May 2001 the psalm

rule calculation or the psalm Psalm

number was 0.47 so just shy of the rule

and it would trigger it the following

month in June of 2001 but the dotc

recession started according to the NBR

in March so it was 3 months into the

dotc recession before we finally got the

confirmation from Claudia 's number

November 1990 you got a trigger then but

that was already several months into the

recession which began in July and a lot

of recessions begin in the summertime so

November 1990 by the time you get the

half percentage Point trigger in the s

number already several months into

recession so economists around Wall

Street are paying attention to the

unemployment rate they're using these

various numbers knowing that there is

sub something substantial going on here

but we don't we don't really need the

Som r we just need to look at the

unemployment rate itself when you look

at the unemployment rate the fact that

it's moved up 7/10 of a percentage Point

since the low is all you really need

that's a solid recession signal already

but with everybody talking about the

unemployment rate and of course now the

S rule CNBC decided they were going to

interview Claudia s because why not what

she said was or what the article said

was as the jobless level has ticked up

in recent months it's actually gone up

every month for the last four months

it's up 410 of a percentage Point since

January the S rule has generated

increasing talk on Wall Street it's

everywhere that what has been a strong

labor market was never really strong is

showing cracks and pointing to potential

trouble ahead well if the Som rule

triggers it's not ahead it's already

happening that in turn has generated

speculation over when the FED finally

will start reducing interest rates the

markets have been doing that s who's now

the chief Economist at New Century

advisors said the central bank is taking

a big risk by not moving now with

gradual cuts by not taking action the

FED risks the Som rule kicking in and

with it a recession that potentially

could force policy makers to take more

drastic action who cares about the FED

it's about the

economy and it's got to the point where

especially with the unemployment rate

punctuating all of this weakness even

mainstream economists and strategists at

the biggest banks and Brokers are

throwing in the towel and saying we see

the FED cutting rates very sharply in

recognition of what's happening in the

economy again it's not rate Cuts aren't

going to help they're just to Fed

admitting and confessing to the weakness

that they also now agree and acknowledge

and they're acknowledging it by lowering

short-term interest rates the economy

has cooled off from its headyy Pace in

2023 with inflation resuming its

slowdown after some unexpected

stickiness said City analyst led by

chief us Economist Andrew Hollen horse

but the institute for supply management

service sector gauge which abruptly

reversed into negative territory it

wasn't abrupt it's been coming for

months in the monthly jobs report which

showed unemployment rising to 4.1% have

raised the risk of a sharper weakening

of economic activity and a faster pace

of rate Cuts they added this being

City's strategist led by their chief us

Economist in fact they have now forecast

that the Federal Reserve is going to be

forced into eight consecutive quartero

rate Cuts beginning in September and

they're going to be forced into that

because by their reading the US economy

is not strong and resilient now Holland

horse and City Group they also mentioned

the decline in temp jobs that I

highlighted from the payroll report

that's a clear cyclical signal too

suggesting substantial deterioration and

of course he brought up the S rule

because everybody's bringing up bringing

up the same thing nowadays continuing he

said on appearance on Bloomberg TV most

economic activity is going to be more

responsive to a 5-year yield the 10year

yield it's not really about the

overnight policy rate so there really

are questions about how much can you

transmit that stimulative effect of

lower policy rates and it's not

stimulative at all and he realizes that

which is why he's focused on the five

and 10e part of the treasury curve

because there's more informational

content in that as well as any possible

effect and impact on the economy then up

at the front end of the curve where the

FED is who's basically saying is the

fed's going to panic into rate Cuts

because they see weakness that is far

beyond their own understanding and

thresholds for tolerating that weakness

and unemployment rate is a big one it's

one you can't really ignore because as I

said before it is the most charitable

view of the labor market and suddenly

it's not very kind to what's

happening but speaking about the

fiveyear and 10year part of the curve

which is a part of the curve that I

watch all the time sort of an initial

indication about conditions in the

general economy the monetary system

whatever the case may be the fiveyear

10year spread basically the entire

Financial World lives and operates in

that part of the curve got mortgages and

everything else 5 to 10 years now it

isn't conclusive but if you're watching

the yield curve and you see big changes

happening that five to 10e space that's

something you need to stand up and pay

attention to and the 5 to 10 year spread

has been inverted on and off over the

last couple years it's been more often

inverted than not and when it uninverted

it has signal big changes in the bond

market it uninverted in a substantial

Way Way Back in May of last year at the

tail end of the banking crisis just

after first Republic failed which was

sort of a final last Terra of that part

of the banking crisis and that part of

the yield curve history it uninverted

again very more sharply more bull

steepening in October even before we got

to the big Bond rally the 5ye 10e spread

uninverted signaling that there was

changes underway in the treasury market

of course the bond rally actually

happened at that time too so as you get

the 5year 10year uninverted last year we

got the big rally in bonds maybe the

recession began half a recession at the

very least as we see they all over the

household survey the unemployment rate

the 5year 10year spr spread flipped

positive again uninverted bull

steepening over the last several weeks

so the point that it's made a pretty

noticeable move and as of yesterday got

up to about six basis points and a

positive spread on on inverting bull

steepening potentially

there this is something we see as a

maybe a first step toward the full curve

moving in that direction the bull

steepening case in the curve it's not

again the fiveyear 10e spread is just an

initial signal we would like to see it

make a more decisive move as it does

preceding recessions such as in 2007 you

got you got a really big uninversity

in July of 2007 heading into the crisis

in August same thing also if you go back

to 2000 just before the dotc recession

you see the 5year 10e spread one of the

first parts of the curve to un invert in

the bull steepening case as early as

November 2000 in fact it was a couple

months before Allen Greenspan started

cutting rates in January of 2001 and it

was about five months before four months

before the recession began so you see a

pretty substantial move in the 5year 10e

spread un inverting and bull steepening

in 20 01 before the recession there as

well but as I keep pointing out it's the

5year 10e spread by itself is not

conclusive and right now the 5ye 10e

spread on inversion that we're seeing

while consistent with a B steepening

case it's just a a nent move it's not

anything that is conclusive and decisive

at least not yet but going along in the

context of everything else that we're

talking here that's something that we

need to pay attention to because it

could potentially point to the full bull

steepening case which would be a timing

signal as well as confirmation signal so

now we got everybody talking about the

unemployment rate and again the

unemployment rate is the most charitable

view of the labor market and if the most

charitable view of the labor market is

suddenly less kind about the labor

market that's something that you need to

pay attention to and Wall Street

strategists are now paying full

attention to it as is Mr Powell as he

kind of admitted under his breath in

testimony before Congress they see the

unemployment rate and suddenly this

strong and resilience in the labor

market doesn't fly doesn't wash anymore

the labor market and the US economy are

far weaker than people have been giving

you credit because they have been led to

believe that we dismiss all of these

warning signs along the way because J

Powell said strong and resilient well

the unemployment rate is one signal that

it's become impossible to completely set

aside and ignore I've said all along

that this was a cycle as a cycle this

was always how was going to end while

the US watched economy after economy

around the world tilt in the recession

it was only a matter of time before it

tipped into one two after all I believe

we've been halfway to a recession since

last September and October and maybe got

three qus of the way there over the last

couple months as the unemployment rate

Rose continued claims spiked companies

complained about their customers having

no money to the point that even the

cheerleaders on Wall Street are changing

their tune and embracing timing signals

like the Som Rule and while they do

we're going to keep our eye on other

timing signals too across the yield

curve because the economy is not strong

and resilient and more and more people

are starting to realize

it I went over all the Gory details

behind the ism Services index and its

solidly recessionary signals in the

video linked below as always thank you

very much for joining me check out your

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are a new member or an existing member I

can't thank you enough so thank you to

all your members and subscribers and

until next time take care