Weekly market commentary

February 14, 2023

 
 

Jobs number makes markets nervous

The surprisingly high January jobs number sent waves of anxiety through U.S. markets last week, before Federal Reserve Chair Jerome Powell gave a speech reinforcing the widely held view that the Fed will stop or pause rate hikes soon. Chairman Powell said the disinflation process has begun, but that’s only in the goods sector; he added that the non-housing sector isn’t showing any disinflation yet. He also said the process of taming inflation is “going to take quite a bit of time” and “is not going to be smooth.”

Regarding the January employment report, which registered 517,000 jobs added, Chairman Powell said, “The employment report shows you why this will be a process that takes a significant period of time.” That’s how central bankers say they think things are looking better to slow or stop raising rates – but they need more confirmation before they can commit.

The jobs number is complicating things for the Fed. Think of inflation as a bathtub full of water. The easiest way for the water level to go down is to pull the drain plug. Job losses, lower spending and an accompanying recession serve as the drain plug and would fix the water level, but they may not leave any water in the tub. The Fed, through its incessant incrementalism, is dipping a ladle into the tub, trying to lower the water to an acceptable level. Chairman Powell will never say “we’re done,” and it will always be couched as the Fed is proceeding cautiously and making decisions based on current circumstances.

With that as a backdrop, it is any wonder why markets are stuck in place? The S&P 500, for example, runs up to 4,200 when companies report earnings that surprise to the upside or down to the 4,000 level following rumblings that rates may remain higher or a recession will go deeper. The next few months likely won’t be smooth ones, but we think markets will finally move upward when we emerge from this period.

Putting things into perspective

With all the ups and downs we’ve seen in the markets the past few weeks, it’s always important to put things into proper context. After a strong January, markets are consolidating. The narrative keeps flipping back and forth, from enthusiasm that the Fed will pause soon and a recession will be mild to rumors that the Fed will continue to raise rates and angst over a potentially deeper recession.

Rates at the short end of the curve continued to climb last week, a signal that bond market traders expect more Fed tightening in the near term. The yield curve inversion, or the degree to which the yield on the 2-year Treasury exceeds the 10-year yield, also widened to record territory at 0.85%, exceeding a previous record set in 1981. Any time the 2-year yield exceeds the 10-year, it’s considered a strong indicator of a coming recession, so such a wide spread should be alarming. And yet in the real economy, there is little sign of impending doom. Weekly jobless claims, for instance, are hovering around their lowest levels since the late 1960s.

Whichever direction the prevailing wind is blowing from – either from Mt. Optimism or Mt. Doom – markets are going to market. The important thing to remember is to separate yourself from the daily noise and focus on the key driver that will move markets out of this range. As soon as the Fed signals a pause, we think equity markets will begin moving upward. Think about what the signals for a moment: Stocks have stumbled because rates have gone up, which gives people a choice they haven’t had in recent years. Once you have a cap on rates, that’s when people begin to reassess the amount of additional risk they’re willing to take. That’s why, when you look at a chart of the market over time, the line is jagged but it’s always trending upward. The adage of, “Time in the markets – not timing the markets – is what’s important” has never been more true. Paying close attention to day-to-day gyrations and trying to pick when to get in and out of the markets is the worst mistake you can make. Stick to your plan and be a disciplined long-term investor in an attention-deficient world.

Coming this week

  • The latest Consumer Price Index (CPI) number will be released on Tuesday. CPI is expected to decline from last month’s 6.5%.

  • Wednesday will be busy; we’ll see retail sales, mortgage applications, business inventories, industrial production and the Atlanta Fed business inflation expectations number. The theme will be “bad news is good news,” because weakness will show the Fed’s actions are working to cool the economy and, by extension, lower the economy. If the news is really bad, that won’t be considered better since the dialogue will turn to a deep recession.

  • Fed member Loretta Mester will speak twice on Thursday. Mester is a traditional Fed hawk, so if she wavers on continuing rate hikes, markets will love that.

  • The week will close quietly, with important and export prices and leading indicators on Friday.