Stock Market Nerd Macro – February 3, 2024
Powell’s press conference was especially market-moving this week:
- No change to rates. Stays at 5.25%-5.50%.
- He talked about needing more confidence in inflation returning to 2% to say they’re ready to cut.
- He talked about gaining that confidence this year as very likely.
- He spoke on the mean projection of 3 rate cuts in 2024.
- The Fed statement removed commentary on potential future policy tightening.
- He told us the committee began to flirt with the idea of slowing down QT, with no definitive plans to do so yet.
- He told us inflation progress is encouraging and the labor market supply/demand balance is improving with wage inflation cooling. He also acknowledged strong progress in the employment cost index (ECI).
- And he said a rate cut in March is not likely.
- March rate cut probabilities fell from 60% to below 40% following the event.
Powell is a fantastic Fed Chair and a master of jawboning. He knows exactly how his words influence market expectations and carefully uses those words like a pro. I’m a fan of his. Still, I think this presser was exactly that: jawboning. If the Fed is data-dependent like it wants us to think, it has no clue what it’ll do next month. It has no clue how many times it will cut this year. There is much more data to come, and the Fed doesn’t have a crystal ball. So? That meeting functioned to make somewhat overly excited markets second guess a March rate cut and future dovish policy. I still think they cut in March because I still see inflation rapidly racing to 2%. The Fed uses backward-looking housing metrics in its key inflation indicators. That’s about 30% of the CPI. And? Real-time rent indicators are pointing to continued rapid disinflation towards 2%.
This expected move, paired with normalizing economic growth, should lead to cuts sooner than later. That normalizing economic growth is all but inevitable, as the benefits of recovering supply chains are now in the rear-view. Still, he had absolutely no reason to show his cards and tell us a cut was coming, so he didn’t.
With all of this said, I don’t really care if the first cut comes in March or June. The disinflation trend is crystal clear to me and so I’ll use market fits in response to the jawboning as a signal to deploy cash. That happened this week following his press conference.
Employment/Consumer Data from the week:
- Conference Board Consumer Confidence for January was 114.8. This compares to 114.2 expected and 108 last month.
- JOLTs Job Openings for December were 9.026 million. This compares to 8.750 million expected and 8.925 million last month.
- ADP Non-farm Employment Change for January came in at 107,000. This compares to 145,000 expected and 158,000 last month.
- Initial Jobless Claims were 224,000. This compares to 213,000 expected and 215,000 last month.
- Non-farm Payrolls for January were 353,000. This compares to 187,000 expected and 333,000 last month.
- The labor force participation rate was 62.5% vs. 62.6% expected.
- The unemployment rate for January was 3.7%. This compares to 3.8% expected and 3.7% last month.
- Michigan Consumer Sentiment and Expectations were both better than expected and improved sharply M/M.
Output Data from the week:
- Chicago Purchasing Managers Index (PMI) was 46 for January. This compares to 48 expected and 47.2 last month.
- Non-farm Productivity for Q4 rose by 3.2%. This compares to 2.4% expected and 4.9% last quarter.
- Manufacturing PMI came in at 50.7. This compares to 50.3 expected and 47.9 last month.
- The Institute of Supply Management (ISM) PMI for January was 49.1. This compares to 47 expected and 47.5 last month.
Inflation Data from the week:
- The Employment Cost Index for Q4 rose by 0.9%. This compares to 1.0% expected and 1.1% last month.
- Unit Labor Costs for Q4 rose by 0.5%. This compares to 1.3% expected and -1.1% last quarter.
- The ISM Manufacturing Prices for January came in at 52.9. This compares to 46 expected and 45.2 last month.
- Average Hourly Earnings in January rose 0.6%. This compares to 0.3% growth expected and 0.4% growth last month.
- Michigan 1 year inflation expectations for January were 2.9%. This is as expected and compares to 3.1% last month.
- Michigan 5 year inflation expectations for January were 2.9%. This compares to 2.8% expected and 2.9% last month.
