Things can now get really interesting. For all the market focus on the end to the monetary tightening cycle, Friday’s employment data refused to adopt this narrative. The data might be impacted by revisions and the like, but it is hard to argue with headline payroll growth that is literally off of the forecast chart.
The 517k rise in January payrolls exceeded the highest forecast of 320k. Add in the two month revisions of 71k, the number was clearly super strong. As noted there will be some revisions, job growth and unemployment both point to a very tight labor market.
The FOMC has dogmatically stated the labor market will be a primary determinate of monetary policy. Economics 101 dictates a tight labor market will create wage pressure.
The markets Friday began to discount the Fed’s version of tomorrow’s reality; an overnight rate over 5% and remaining there until mid-2024. There were some comments a 50-bps increase may be possible at the March FOMC meeting if the CPI remains robust and if there is a stellar February labor report.
On the other hand, some believe January’s labor report which sent the unemployment rate to the lowest level in 53 years is climatic and the unemployment will suddenly rise.
An issue at hand is the lack of available workers. For the exception of technology where there is an ample supply of workers, most companies are hesitant to fire employees. Talent is scarce and expensive.
How realistic is this view of a sudden spike in joblessness?
Late Friday afternoon San Francisco’s Fed Bank President Mary Daly, who is regarded as a dove, stated “December’s projections for interest rates were still a good signal of where borrowing costs are headed.”
She further stated “right now the most important thing to convey to listeners is that the direction for policy is for additional tightening and holding that restrictive stance for some time.”
The next monetary and inflationary projections are expected at the March meeting.
The NASDAQ has rallied about 16.5% since January 1, an advance predicated upon a change in monetary policy and increasing earnings. Was this view shattered Friday as the tech trio of AMZN, AAPL and GOOG disappointed in many dimensions and the strong labor report?
Will 2001 be repeated? As noted on Friday the NASDAQ surged over 25% in January 2001 from its early month lows after plunging over 40% in 2000 and then again plunged about 42% in the proceeding two months as the dubious reality that the stellar advance was predicated upon was shattered.
The economic calendar is relatively light and is comprised of the trade gap, inventory statistics and a sentiment survey.
Last night the foreign markets were down. London was down 0.84%, Paris down 1.48% and Frankfurt down 1.07%. China was down 0.76%, Japan up 0.67% and Hang Seng down 2.02%.
Dow and NASDAQ futures are down 0.50% and 1.25%, respectively ahead of tomorrow’s speech by FRB Chair Powell which may cause a recalibration of monetary policy expectations in context of January’s strong labor report. The 10-year is off 20/32 to yield 3.60%.
