Good morning contrarians! It is Wednesday, March 8.
Fed Chair Jerome Powell didn’t give investors what they wanted yesterday in his testimony. Stocks and bonds sold off once this became clear. The S&P 500 dropped 1.5% on the day. The 10-year yield advanced back up to 3.99% (yields move inversely to prices). Powell returns to Capitol Hill today, this time to speak to the House.
State of Play
As of 0625:
Stock futures are pointing to gains, led by the Nasdaq (+0.3%);
Bonds are mixed. The 2-year is selling off again, with the yield up 2 basis points to 5.04% (it got as high as 5.08% yesterday). The 10-year is unchanged at 3.97%;
Commodities aren’t doing much, with WTI crude oil flat trading at $77/barrel. Copper is down <1%.
Economic Data
Today we get the ADP National Employment Report at 0815. This is kind of the prequel to Friday’s non-farm payrolls. It has traditionally been overlooked since the data is kind of all over the place. But they revamped their metrics a year ago or so and in light of all the talk about unemployment this may bear watching this week.
For what it’s worth, economists expect an increase of 200,000 jobs, almost twice the 106,000 seen last month. That’s a big jump but may have to do with seasonal issues.
Speaking of the labor market, at 1000 we get the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics. Economists expect a headline figure of 10.5 million job openings, down from 11 million seen last month. But the devil, as they say, is in the details. The quits levels are a telling indicator of labor market health seeing how these track what percentage of the labor force willingly quit their jobs during the month. The most recent data, from December, shows many people still doing so, though the quits levels are down from their all-time highs set in late 2021. This would indicate the labor market is still quite healthy.
Earnings
A couple of these to tell you about. Campbell Soup (CPB 0.00%↑) and United Natural Foods (UNFI 0.00%↑) are out before the open at 0930. That's about it.
The Bottom Line
Remember the Fed Fund Futures rate we were talking about last week? At the time it was pricing in a 70% chance of a Fed rate hike of just 25bps at this month’s meeting. The chances of that are now just 28%, with a 50bps rate hike priced at a possibility of 72%. That’s all thanks to Powell’s words yesterday, though the enduring mystery is why anybody ever thought the Fed would start to turn dovish in the first place. The latest inflation readings have showed a troubling uptrend. The Fed can’t cut now just because people want it to.
To the Fed’s credit, they never made any noise about this. None of the Fed speakers even indicated (or hinted at indicating) that a pivot might be imminent. The market just did its thing, which is inject itself with a healthy dose of hope-ium. Nobody ever said markets were rational.
We’ve been consistent here with our concerns about inflation. It’s not rocket science to figure that the Fed won’t be able to pivot until inflation comes down. The magical thinking comes in expecting the Fed to shift course in the face of this reality. Many investors are often guilty of magical thinking. Don’t be one.
Eventually the tables will turn, economic growth will grind to a halt, and the Fed will (assuming we don’t have stagflation) be able to cut interest rates. But a lot can happen between now and then. And it could still be a ways off.
JOLTS, More Powell, ADP Payrolls