There was a lot to absorb this week. Three major central bank meetings, the closely watched payrolls report, a couple other major economic reports, and earnings results from a range of companies including four of the world’s biggest. Somewhat surprisingly, the earnings data was probably the least important of all. At the macro level, fourth quarter earnings are coming in soft – the percentage of companies beating both earnings and sales estimates is as low as it has been in a number of quarters, as you can see below.
At the individual stock level it certainly matters, but investors are far more focused on both the outlook for inflation and what it means for Fed policy.
Rates Are Finally (Real) Positive
For most of the week the dominant narrative was that most of the big central banks are getting close to the end of their rate hike cycle. Last week the Bank of Canada said they were done. This week both the European Central Bank and the Bank of England indicated they were getting very close to taking a pause.
At the Fed’s meeting on Wednesday, Chairman Jerome Powell wasn’t as categorical, but he definitely hinted in that direction. As expected, rates went up by a quarter of a percentage point and the statement said “ongoing increases” would be needed to bring inflation under control.
However, during the press conference Powell took on a much more accommodative tone. He talked of inflation being past its peak and on a path towards much more acceptable numbers. The market really liked his comment that rates are already restrictive, and that the Fed was sensitive to this. What he meant by this is that the Fed Funds rate is finally higher than the inflation number they like to track (core PCE deflator). As you can see in the chart below, rates (orange line) are back above inflation for the first time since 2019 (this means real – inflation adjusted rates – are positive).
Oh, how things change in 24 hours. Or more accurately, how perceptions change. On Friday there were two key reports that undermined this narrative. First, the ISM Services number showed surprising strength. It bounced back from contractionary territory (anything below 50 indicates contraction).
Economists were expecting 50.5 – it came in at 55.2.
Then there was the jobs report. Wow, talk about a doozy. January nonfarm payrolls grew by +517k versus the consensus estimate of +188k.
This was a big number. To give you an idea just how ‘out of left field it was’, no economist out of more than six-dozen who ventured a guess were anywhere close. The highest estimate from 77 forecasters was 320,000. The 517,000 headline print nearly tripled consensus.
Not a good day for the economists!!!
Job growth was broad based, with only tech showing meaningful losses.
The good news from an inflation/Fed policy perspective was that average hourly earnings increased 4.4% YoY in January, the slowest growth rate since Aug 2021. Despite the tight labor market, wage growth is still slowing.
But the big jobs number certainly undermined the idea that the Fed was close to being done with their tightening cycle. Maybe it was an aberration? Anything is possible in the jobs numbers. But Friday’s whipsaw will keep people guessing for some time to come.
(Other) Charts We Found Interesting
- More on the labor market – the number of job openings increased in January. This also speaks to the tightness in the labor market.
- Despite the strong jobs report, traders are still betting on a quarter-point hike on March 22nd.
- Inflation in rents continues to slow down – this is important because it makes up close to a third of the CPI.
- A lot of froth has come out of the speculative growth names, but valuations certainly aren’t back to normal.
- Office occupancy rates at the end of January – still not back to normal. Not even close.
- Per the Bureau of Labor Statistics, college tuition today is 13.5x what it was in 1980, versus a 3.8x multiple in the price of all goods and services.
- Along the same lines, student loan debt grew from $220 billion in 2003 to $1.6 trillion in 2022. Now which way does the feedback loop work – rising tuition costs drive rising debt, or easy debt availability feeding through into tuition inflation?
- From Jim Bianco:
“Tom Brady announces retirement from NFL - Brady has an offer from Fox to be its lead analyst for 10 years at $375 million. So, he is not a retiree; he is a job switcher.”
Wage growth for job switchers outpaces that for people staying in their job, and that’s before factoring in Brady’s gargantuan deal.
Have a good weekend.
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