Capital markets perspective: More swivel than pivot
Capital markets perspective: More swivel than pivot
Capital markets perspective: More swivel than pivot
The Federal Reserve’s decision to keep rates unchanged for a third consecutive meeting was itself a non-item – markets had dismissed that notion long before the Federal Open Market Committee meeting started last Tuesday.
However, about midway through the subsequent press conference when Fed Chair Jerome Powell suggested that March probably would not be the right time to signal rate cuts, it was immediately clear that his pivot that took place after the Fed’s last rate-setting meeting in mid-December was really more of a swivel.
Powell’s message on Wednesday was clear: Inflation was not in the process of re-igniting, nor was it even true that the committee was worried that all their efforts to rein in prices weren’t paying off. Instead, Powell simply pointed out that the economy’s ongoing strength – even in the face of more than 500 basis points of rate hikes – was affording them an opportunity to wait until they were even more convinced that inflation had been well and truly beaten.
That seems like an entirely reasonable train of thought, and it’s not even all that inconsistent with prior Fed messaging, which Powell repeated on Sunday evening in an unusual appearance on CBS’ 60 Minutes. And that’s probably why Wednesday’s sell-off was relatively short-lived: The Fed’s willingness and ability to hold rates exactly where they were for at least a little while longer wasn’t shocking or new, and it’s premised on something that markets appreciate: a strong U.S. economy.
That same idea – that markets generally prefer a strong economy to a weak one – probably also helps explain why Friday’s blowout payrolls report didn’t generate a second market sell-off last week. For the record, the U.S. economy created another 350,000-plus jobs in January, far more than economists had expected.1 The December payroll gain was also revised significantly higher – something that hasn’t happened all that often recently. Meanwhile, aggregate unemployment held steady at 3.7% and hourly earnings surged 0.6%, roughly twice the rate expected by analysts.
If the Fed were “in play,” these hotter-than-expected results would almost certainly have sparked a sell-off in stocks. But because Wednesday’s press conference took even a discussion of lower rates during the March meeting mostly off the table, Friday’s payrolls figure didn’t tell us anything we didn’t already know about the Fed. That in turn allowed equity markets to focus instead on the positive nature of Friday’s payrolls release.
For what it’s worth, bond markets seemed a little less blasé about the payrolls print than stocks, and yields moved notably higher on Friday – at least those rates further out on the yield curve. But there were still a few other things inside last week’s jobs-market data that may have felt reassuring, including wage and pay data from payroll processor ADP.2 The firm’s Pay Insights report showed that the COVID-inspired anomalies in how workers are compensated is finally coming to an end. To wit: Mass firing and re-hiring of millions of leisure and hospitality workers during the pandemic shut-ins and subsequent re-opening caused pay growth in that sector to temporarily outpace the rest of the economy by a factor of two. The same goes for the wage growth for those who left their current job for a different employer, which was also twice as high as those who chose to stay put. But as of January, both of these oddities seem to have mostly evaporated – a sign that labor markets are finally returning to normal.
Moreover, layoff data from Challenger, Gray & Christmas last week confirmed what the layoff announcements have been suggesting for a few months: Regardless of how strong payroll growth is or how tight labor markets are, a safety valve still exists in the form of layoffs. In January, U.S. employers announced plans to cut roughly 82,300 workers – more than double the amount laid off in December and the second-worst January since the Great Recession of 2009.3 That, plus very visible announcements last week from Deutsche Bank and UPS (who announced plans to lay off 3,500 and 12,000 workers, respectively) serve as reminders that unemployment and interest rates still do correlate to one another. As long as layoff announcements don’t multiply too quickly, or job losses get too far out-of-hand, that proves that the jobs market still knows how to vent steam if needed.
Meanwhile, the banking sector served up a stark reminder that jobs and economic growth aren’t the only things at risk from high and rising interest rates. In what felt like an eerie replay of last March’s regional banking crisis: Two mid-sized lenders – New York Community Bank and Japan’s Aozora Bank – shocked investors last week by suddenly setting aside huge loan provisions to cover potential losses from existing investments in the U.S. commercial real estate market. While the details between last year’s episode and the current troubles are significantly different, last year’s Silicon Valley/Signature Bank collapse and last week’s CRE-related issues have at least one thing in common: They were caused by massive asset write-downs that were in turn a function of the high-rate environment sparked by the Fed’s campaign against inflation.
For now, both markets and the Fed are taking Aozora and NYCB’s troubles in stride. In fact, Powell was asked about it in a roundabout way during his 60 Minutes interview, and he downplayed the idea that the commercial real estate market could bring down the economy in the same way that the residential mortgage crisis sacked banks and the economy in 2008.4 But Powell also admitted that things like bank runs can develop far more quickly today than they did 20 years ago with the help of social media and round-the-clock coverage, which may have been his way of warning us not to completely ignore it, either.
And it’s always worth remembering that speed is often a factor in the gnarliest and most unexpected of accidents – an old cliché applies that as well to interest-rate-juiced economies as it does to highway traffic.
What to watch this week
It’s an unusually quiet week for economic data, with Monday’s ISM and PMI data for the services sector and Thursday’s weekly read on unemployment claims standing out. There will be multiple opportunities for various Fed officials to either reinforce or refute Powell’s post-FOMC comments or the message from his 60 Minutes interview, including speeches by Atlanta’s Raphael Bostic on Monday, Loretta Mester (Cleveland) on Tuesday, and a trio of Fed members – Thomas Barkin, Susan Collins and Michelle Bowman – on Wednesday. It’s possible than any one of these speakers (or the handful of others also scheduled to make remarks this week) could deviate from the script, but last week’s FOMC decision was unanimous, and recent Fed communications seem generally to be aligned around Powell’s message. We won’t know exactly how aligned until the minutes from last week’s meeting are released next month, or unless any officials say something divergent when they step to the podium this week.
Barring a surprise from the banking sector, that leaves the earnings calendar firmly in charge of the narrative. Last week’s results were again a mixed bag, with some firms beating current expectations, guiding estimates higher and being rewarded for it in the process (GM qualifies here) while others (UPS, Starbucks and others) pushing expectations in the other direction. One notable release came from appliance maker Whirlpool, which has struggled given the ongoing downturn in housing. New this quarter, though, was an admission from management that supply chain difficulties was leaving a mark.
This week’s earnings calendar represents a broadening of sectors away from finance and banks (which kicked off the season two weeks ago) and big tech/big oil, which dominated last week. This week’s highlights will include several automakers that could serve as a crosscheck on GM’s strong results and forward guide last week (Ford and Toyota both report on Tuesday), as well as a handful of semiconductor and semi-related companies that could help resolve the question of whether recent AI-related intrigue has translated into real demand or just hype. Specific companies that might be worth your attention include China ecommerce giant Ali Baba (Wednesday) – which will provide a read into whether China’s flagging economy is likely to rebound anytime soon – as well as global construction and agricultural equipment producer Caterpillar, due to report on Monday. Watch also for oil majors BP (Tuesday) and Conoco-Philips, alongside commodities giant ADM, any one of which could have interesting things to say about the level of aggregate demand for critical commodities as economic growth continues to decide which way to break.
But we’re also nearing the point that arrives toward the middle of every earnings season where quantity overrides all other considerations. Very soon, accountants will begin tallying the aggregate results in an effort to answer the unasked question on every strategist’s lips: Have corporate earnings held up as well as the economy itself (justifying rising market valuations in the process), or is there still a shoe left to drop?
Time, as always, will eventually tell.
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