Headline data looks “solid,” but there are many contradictions

January’s nonfarm payrolls (NFP) data was always destined to move the market, especially after Fed Chairman Jerome Powell said the Fed would cut interest rates in 2024 but that March was not the base case. . His NFP number of +353,000 (consensus was +185,000), with the December number revised upward from 216,000 to 333,000, and a +0.6% increase in average hourly wage almost sealed the deal. The market’s probability of a rate cut in March is currently just 20%.

Stock markets cheered on NFP’s headline numbers, with the S&P 500 up nearly 1.1% and the Nasdaq up more than 1.7% on the day. But bond prices took a hit as yields rose. U.S. Treasuries, which had fallen as low as 3.83% on Thursday, rose 20 basis points (bp) to close at just over 4.02%. Note that the last rising line on the right side of the chart is from his Friday, February 2nd.^n.d..

Contradiction

Of course, these market movements are instinctive reactions. (Buy now, ask questions later!) But like the past few months of data, there are many inconsistencies and contradictions in the just-released employment data.

Similar to last month, the Household Survey (HS) of Sister Households, which the media ignores, revealed headline employment numbers down by -31,000 and full-time employment down by -63,000. (In December, HS revealed a total loss of -683,000 jobs, of which -1.5 million were full-time jobs.) This survey was conducted at the same time as the NFP survey, which also Strict. Unfortunately, that’s not the case with the “Soft Landing” or “Goldilocks” stories. Therefore, it will be ignored. The two studies paint very different pictures of the economy. Which one should you believe?

Let’s look at other evidence. Weekly working hours themselves shrank to 34.1 hours from 34.3 hours in December and 34.4 hours in November. This is the lowest number since March 2020 (the pandemic) and before that, November 2008 (the Great Recession). Rosenberg Research calculated that despite the increase in employment, total hours worked are actually decreasing.

It’s clear that employers are holding on to their employees after the extremely tight labor market of the past few years. Rather than lay people off, they are reducing their hours and relying more on part-time workers (shorter hours and no benefits!). Additionally, employment is slowing down. This is also evident in surveys by local federal banks, with employment sub-indices declining across the board. As you can see from the graph, the number of posted jobs is on a fairly rapid decline. Opinion polls show that consumers believe it is becoming harder to find work, and as a result voluntary redundancies are declining rapidly.

The U3 unemployment rate remained at 3.7%. This was due to a decline in labor force participation (people dropping out of the labor force, which is also a negative sign). The unemployment rate is calculated using the Household Survey, so to keep the unemployment rate the same, a decrease in the number of jobs (numerator) of -31,000 must be matched by a proportional decrease in the labor force (denominator). there is.

The more comprehensive U6 unemployment rate index rose for the second straight month by +0.1 points to 7.2%. Additionally, the number of people working part-time for “economic reasons” (unable to find full-time work) increased by 211,000 in January to 4.42 million, the highest level in two years. . A year ago, this number was 3.95 million.

According to Rosenberg Research, the NFP report shows a +1.28 million job increase over the past five months, while sister school HS has a net loss of -350,000 jobs. The economic impact is significant (i.e. growth and contraction). So which one should you believe?

Growth or contraction?

An overview of the economy leans toward HS.

· Business research is never bright. This graph shows the overall diffusion index for regional Fed surveys. Notice the rapid decay on the right.

・The Chicago PMI report covering Illinois, Indiana, and Michigan recorded a reading of 46.0 (50 is the dividing line between expansion and contraction) in January, with most of the sub-indices also falling below the 50 mark.

· The bank’s fourth quarter profit was significantly lower than the same period last year.

• Keycorp: -90%
• Comerica CMA: -90%
• Zions: -50%
• PNC: -40%
• Trustee: Loss

The gist of the report points to debt-laden, over-built office and multifamily real estate, as well as significant additions to loan loss reserves due to declining consumer credit quality.

-NY Community Bancorp shocked the market last week by posting an unexpectedly huge loss in the fourth quarter. The cause of the loss was in the commercial real estate (CRE) portfolio. This is expected to be just the tip of the iceberg, given the dependence of local banks on his CRE loans.

· Rosenberg Research says fourth-quarter profits for S&P 500 companies will not be higher than the second quarter of 2021. This meant that the situation remained stagnant for about three years. Therefore, the rise in stock prices is solely due to the expansion of the P/E ratio, or profit multiplier. This ratio typically decreases in a high interest rate environment.

· Despite the NFP data, new unemployment insurance claims are increasing. The week ending January 27th was +224,000, up from +215,000 the previous week. The latest information on continuing unemployment insurance claims rose to 1,898,000 (+50,000) for the week of January 20th.

· The ISM manufacturing business index rose to 49.1 in January, but has now been negative (less than 50) for 15 consecutive months. Notice in this table that there is an overall contraction in the levels of both the December and January sub-indices.

· The regional Fed’s monthly manufacturing and services surveys all suggest contraction. This graph is a composite of the Philadelphia, Kansas City, New York, Dallas, and Richmond Fed Manufacturing Surveys. Some of these studies showed large negatives in their January reports (right side of the graph).

FRB

In addition to all the data releases, last week was also the week of the Fed meeting. Powell acknowledged in a post-meeting press conference that barring rising inflation data, the Fed’s next action would be to cut interest rates. But when? ” is a question without an answer.

• If the economy had a “soft landing,” the Fed would want to move interest rates to “neutral,” defined as the 2.5% federal funds rate. Currently, that rate is over 5.25%, which would drop nearly 300 basis points.
• If the economy goes into recession, they will want to lower interest rates well below the neutral level, to say 1%. This is a reduction of more than 425 basis points.
• In a “strong” economy, the Fed is likely to keep policy on the “restrictive” side. Given the Fed’s sensitivity to key data, a “strong” NFP report is likely to put the final nail in the coffin for a March rate cut. As of this writing (Friday, February 2nd), the market’s probability of a March interest rate cut has fallen to 20%, and the May rate cut probability has fallen to 73% (90%).

Inflation – good news

Inflation statistics continue to improve, and Chairman Powell acknowledged this in his press conference. He said the Fed doesn’t need to see any further improvement in inflation statistics, it just needs to see that the data continues at its current reading for several more reporting periods. That would give the Federal Open Market Committee (FOMC) more confidence that inflation is under control.

We note that the CoreCORE PCE price index fell to +2.9% year-over-year in December. More relevant are the trends for the bottom 6 months (+1.9%) and 3 months (+1.5%) (see graph). The Fed will need to see a continuation of the latter two trends in order to begin a rate-cutting cycle.

As noted in a previous blog, rents, which account for 33.9% of CPI, have been falling since mid-2023 (see graph). Because the CPI uses deferred rents, there will be significant downward pressure on the index for the next few months. His next CPI release is scheduled for Tuesday, February 13th. We expect a continuation of the tier/annual downtrend. Additionally, rents will likely continue to fall, as apartment complexes under construction are at record highs and are just now hitting the market in an environment of rising vacancy rates.

housing

High mortgage rates reduce affordability. Housing prices are also high. Both exist in today’s housing market. Mortgage interest rates are a function of the monetary policy discussed earlier. High home prices are a function of supply and demand. Homeowners were locked into homes with mortgage rates below 4% due to a decade of ultra-low interest rates before the Fed raised its first rate in 2022. Given today’s much higher interest rates, if a homeowner sells and buys another home, their mortgage payments could nearly double for the same amount borrowed. Existing home sales are sluggish because most homeowners are stuck with these low interest rates. The new housing market has benefited from limited supply in the existing housing market, especially as home builders have been more willing to offer concessions such as buybacks on mortgage rates. As you can see from the graph, existing home sales are at record lows, and new home sales are near their highs but have recovered from their 2022 lows. Still, the housing market is mired in recession, and only lower mortgage rates can improve the situation.

final thoughts

• As Mark Twain once said, “If it seems too good to be true, it probably is.” That seems like an apt explanation for the headline employment statistics. In fact, as we have seen, there are many inconsistencies in the data.
• Nevertheless, the Fed is obsessed with lagging and headline data. The numbers that matter most to them are CPI (12-month retrospective), NFP (not HS), and U3 unemployment rate. At this point, none of this is likely to be a reason for a rate cut.
• The NFP numbers are likely to put the final nail in the coffin for the March rate cut. There’s still a lot of data coming in between now and the Fed’s mid-March meeting, but the data, especially the news on inflation, will have to be very good for the Fed to lower rates in March. right.
• While the media and Wall Street experts are praising the “soft landing”/Goldilocks economy, the underlying data paints a different picture for us. We see looming banking issues surrounding commercial real estate, an unhealthy housing market, and a number of conflicting employment statistics.
• Fourth-quarter corporate earnings are currently not as high as they were nearly three years ago, and the Fed is “tight for a long time,” so we think there’s a lot of air in the stock index right now. buy bonds

(Joshua Barone and Eugene Hoover contributed to this blog)

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