A Forced Reckoning
Fed Faces a Distorted Reality
Preface
There are no big economic events scheduled for the upcoming week in the US. We’ve got CPI on February 14, and that’s going to be huge. But for now there’s a nice interval of virtually uninterrupted trading and price action ahead.
The one moderate-impact event is Michigan Consumer Sentiment Index on Friday, and we’ve got several Fed speakers throughout the week including Jerome Powell on Tuesday. it’s always a bit of a wildcard when he speaks, and could spark a little more excitement in the price movements. We can only hope!
Latest Economic Data
US Non Farm Payrolls
- 517K vs 185K consensus and 260K prior
Being that this was the highest number since July 2022, analysts struggled to interpret the reasons behind such a big jump. But temper the enthusiasm for a minute, because this figure is likely to be revised lower in the future.
Here’s the highlights (Source):
- The US economy unexpectedly created 517K jobs in January of 2023, the most since July 2022.
- Job growth was widespread in January, led by gains in leisure and hospitality (128K), professional and business services (82k), health care (58K) and government (74K).
- There were also big revisions, with employment gains in November and December combined being 71K higher than previously reported.
- The January data continued to show a tight labour market although some companies prepare for an economic slowdown and the tech layoffs continue.
Even with such a hot print, the S&P500 only lost around 1% of its recent gains on Friday and the Nasdaq was off by 1.5%. Again it feels like ‘good news’ is slowly starting to act like good news again and there’s more overall bullishness on the likelihood of a soft landing.
Don’t expect prints like this to continue though imo. There are some major distortions going on behind the scenes…
US Unemployment Rate
- 3.4% vs 3.6% consensus and 3.5% prior (Source)
This is the lowest headline unemployment rate in 54 years, and yes the Administration took a victory lap in its wake. However, the BLS labour surveys are flawed in almost every conceivable way.
The real unemployment number is much higher when you account for millions that have dropped out of the labor force over the past few years along with a huge percentage of unemployed Gen-Z population.
MishTalk has been covering this phenomenon with impressive detail. He mentions the shrinking labour force from early retirements, Covid concerns, and the pandemic-era stock market boom. Many have never returned to the workforce, and millions more eligible workers have completely withdrawn from it.
By stricter measures, the real unemployment rate is probably around 6.6% (Source)
Confronted with these distortions, the Fed has to make a judgment call on the real strength of the labour market and how that may affect its policy.
It seems the coming recession may be different from others in that unemployment may not rise as quickly or acutely. How the FOMC reacts to this is important and will have huge impacts on the markets.
I wait for the day when Jerome Powell admits that the job market is extremely fragmented and most of the new positions being added are part-time and temporary in nature. It would be nice to hear him concede that its impacts on inflation expectations were previously overstated, as the numbers would seem to indicate:
Payrolls vs Employment Since May 2022 (Source)
- Nonfarm Payrolls: +3,031,000
- Employment Level: +1,893,000
- Full Time Employment: -166,000
Why is overall employment increasing at such a rate, while full-time employment remains negative since May 2022? Are people taking second or even third jobs just to make ends meet? The BLS hasn’t taken steps to clarify these concerns.
Will we come to a day of reckoning before long?
Question everything you see and don’t buy the headline hype.
Quick Takes
Although my personal view is that the FOMC will pause rate hikes soon, my optimism is tempered by this view from Nick Timiraos, AKA “The Fed Whisperer”.
Nick says that with the labour market so tight, the likelihood of a pause and then continuation of rate hikes is just as plausible as a pause and cut.
It’s true – if things deteriorate on the inflation front and the labour market doesn’t budge, the Fed will be in a tough spot.
Then there’s this. We’ve talked before about how the American consumer is maintaining a comfortable lifestyle on borrowed money. Here’s another reminder.
Chart of the Day
Maker is a coin I’m confidently building longs on in the short term. Its strength vs BTC is notable. MTF targeting mid-low 0.05s range on the BTC pair. Notice how many times it’s interacted with those levels in the past.
Maker is a governance token and its long-term performance is tied to the viability of DAI stablecoin, which has 10X’d in market cap since the start of 2021. Let that sink in.
Earnings
Robinhood and PayPal set to report later in the week. We’ve also got a few energy companies in the mix.
If you enjoyed this, be sure to check out my previous issues!
Jay Charles
Editor in Chief, The Trading Tank.
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