Fed Reserve Building

Terminus

The Fountain Hugh Jackman

The end of the line for rate increases? This was quite a week for the markets as we got over 800 earnings reports, a Fed policy statement and a jobs report that was way better than anyone expected (more below). The pessimism that has permeated governments, central banks and c-suites has been palpable over the last several months. Did we all get too bearish? Is there a path to a soft landing?

I think we all know that higher rates are a big problem given the amount of debt creation since the financial crisis. The pandemic fueled even more debt issuance so the next twelve months will reveal the potential for credit cycle in the coming years. The good is that inflation rates are declining and job growth is increasing while wages flatten. I doubt any economists are using these variables in their models but that is the scenario right now. Some will say the strong jobs market mean higher rates and wage inflation but keep in mind state-level pandemic stimulus is just wearing off. Meaning, many Americans are now finally motivated to get up and get a job.

If true, this means an end to a tight labor market where businesses overpay for under skilled workers. The CFO of Starbucks mentioned in their earnings call that they are finding it easier to hire people in a sign that this may be a nationwide trend. If true, the jobs numbers should look good in the coming months.

The higher cost of labor is an input that companies must pass along to their customers. If enough people come off the sidelines and get back to work this may be a situation where wages pressures dissipate helping the inflation outlook. There are over 11mm job openings so the employment data will be under a focal part for fund managers in the first half of 2023.

The Stock Market

The S&P 500 breakout of the green trend line is undeniable at this point and this set-up is the same across all of the major indices. Will it hold? We are in overbought territory now so I expect that we will have a pullback of some kind that may re-test the 400 area near the 200-day moving average. A successful pullback and move above the $430 area (labeled “B” and also the August high) would put an uptrend on solid footing. Now we wait and see if the market can recover from this year long correction. A breakdown below $375 would mean the downtrend has reasserted itself and new lows on this chart would be very likely.

S&P 500 by @kiscocap

Economic Data

Central Bank Interest Rates
  • The Federal Reserve nudged up short-term interest rates 0.25% on Wednesday and signaled another quarter point was possible at their March meeting.
  • Europe’s major central banks raised their key interest rates 0.5% but offered varying messages on their respective policy paths. Growth and inflation among the member countries is uneven plus there is uncertainty on how China’s rapid reopening will affect these metrics.
  • The European Central Bank (ECB) raised rates 50bps on Thursday to 2.5% and messaged a similar increase at their March meeting. THE ECB will play catch-up for most of 2023 as they lag the Fed which is now at 4.75% and the Bank of England is at 4%.
NFP
  • The Nonfarm Employment Jobs number soared in January by 517,000. Despite large technology firms laying off thousands of workers the small companies more than made up for the losses. This is a good sign of workers returning to the workforce and should help cool wage inflation.
  • The unemployment rate, which is based on a survey of households, fell to a 50 year low of 3.4%.
  • Initial jobless claims are at VERY low levels and last week came in at 183k.
JOLTS
  • A wave of corporate layoffs that began in technology is now flowing through other industries. Employers who felt they had less leverage in the tight labor market of the past couple of years say they have more power in negotiations with employees. (WSJ)
  • The January ISM services index rebounded to 55.2 from 49.2 and that was well better than the estimate of 50.5.
  • S&P CoreLogic reported the November home price index slowed to +7.7% from +9.2% in October.
  • January vehicle sales totaled 15.7mm at a SAAR, above the estimate of 15.5mm.
Avg Hourly Earnings
  • Hourly wages rose a very modest 0.3% in January from December. The 12-month growth rate for all private-sector workers did slow to 4.4% from 4.8%.
  • Job openings (JOLTS survey) in December rose to 11mm from 10.4mm in November which was 700k higher than expectations. The hiring rate was 4%, up from 3.9% in November and unchanged with October. The quit rate stayed the same at 2.7%.
  • The average workweek for private-sector employees jumped in January, an indication that demand for labor remains strong. Hours had been trending lower since early 2021 and hit a post-pandemic low in December, a development that suggested employers were holding onto workers even though there was less for them to do. (WSJ)
Average Weekly Hours
Paul McCarthy, President of Kisco Capital, LLC

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.