Employment still in a 'slow bleed' status, says MacroPolicy Perspectives' Julia Coronado
Summary
- Labor Market "Slow Bleed": Coronado argues the US labor market is not stabilizing but rather in a "slow bleed" phase. Demand for workers is lower than supply, leading to slowing wage growth and an upward drift in the unemployment rate.
- Fed Policy Outlook: Despite political noise regarding the Fed Chair position, Coronado expects "another cut or two" this year based purely on economic data (rising unemployment), not political pressure.
- K-Shaped Economy: There is a sharp divergence between financial assets (AI stocks "coming up roses") and the real economy. The average consumer is facing wage stagnation and is becoming increasingly budget-conscious, specifically impacting big-ticket items like autos.
Trade Ideas
Coronado forecasts an "upward drift in the unemployment rate" and states this data supports a baseline of "another cut or two as the year unfolds." Bond prices are inversely correlated to interest rates. If the labor market weakens ("slow bleed") and the Fed cuts rates to support employment, yields will fall, causing long-duration Treasuries (TLT) to rally. LONG bonds as a hedge against the deteriorating labor market. Inflation re-accelerating, preventing the Fed from cutting despite labor weakness (Stagflation).
Coronado notes that "auto sales... went down quite a bit in the fourth quarter" and automakers are modeling a "pretty price sensitive, budget conscious consumer in 2026." The automotive sector is highly cyclical and sensitive to consumer credit and income. If wage growth is "barely beating inflation" and sales are already dropping, legacy automakers face margin compression and inventory build-ups. SHORT mass-market automakers exposed to the weakening average consumer. Unexpected drop in financing rates stimulating demand; government subsidies for auto purchases.
Coronado states the "average consumer is not doing so great" and that wage growth has "grinded lower to where it's barely beating inflation." Consumer Discretionary stocks (XLY) rely on excess disposable income. With the labor market in a "slow bleed" and wages stagnating, discretionary spending is the first to be cut. SHORT the consumer discretionary sector to play the "lower leg" of the K-shaped economy. A "soft landing" where inflation drops faster than wages, suddenly boosting real purchasing power.
While the consumer struggles, Coronado observes that "the stock market and anything tied to AI is, you know, everything's coming up roses." This highlights the "K-Shaped" economy. Capital expenditure on AI infrastructure is decoupled from the average consumer's wallet. Investors should remain long the winners of the "K" (AI/Tech) while avoiding the losers (Consumer Cyclicals). LONG AI beneficiaries as they are insulated from the labor market "bleed" affecting the broader economy. Valuation compression if the broader economic slowdown eventually impacts enterprise tech spending.
