Unemployment Hits 50-Year Lows
But Debt Ceiling Looms
Preface
During the FOMC press conference on Wednesday, Michael McKee of Bloomberg posed the big question to Fed Chair Jerome Powell: “Are you ruling out the rate cuts that the market has priced in?”
Powell responded, “We on the committee have a view that inflation is going to come down not so quickly. It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates. Markets from time to time have been pricing in quite rapid reductions in inflation. We factor that in but that’s not our forecast.“
Powell also projected that there will either be no recession or a very mild one. Meanwhile the Fed minutes showed consensus for a recession this year along with an increase in unemployment.
On top of all that, Powell once again reiterated his view that “the banking system is sound and resilient”. This sparked quite the controversy as many regional banks continued to lose market cap throughout the week and there are few signs that the banking turmoil is coming to a close.
This last point is exactly why, in my view, the market shrugged off J. Powell’s comments and bonds as well as Fed Funds continued to price in high odds for 75bps in rate cuts before the end of 2023 following the FOMC rate decision and press conference.
Market participants do not agree that the banking system is sound and resilient, and they believe a recession and/or more economic turmoil is on the way.
So who will be right? The Fed or the market? Stay tuned…
US Debt Ceiling
The debt ceiling struggle comes with some pretty heavy implications. If the US were to actually default on its debt obligations, that could result in an inability for the government to pay out social security, medicare and military salaries.
The magnitude of its widespread effects are impossible to gauge because it’s a position we’ve never been in before.
Jobs Report
On Friday, the Nonfarm Payrolls report showed that the US economy added 253k jobs vs 165k in March and 180k consensus. This reverses a 2-month downtrend.
Unemployment rate unexpectedly fell from 3.5% to 3.4% vs forecasts of 3.6%. This ties the January level and marks a 50-year low in US unemployment. It’s a stunning chart when you look at the pandemic distortion.
This drop in unemployment gives the impression (illusion?) of a soft landing and cheered the markets to close out the week with strength.
S&P500 Update
Following impressive Apple earnings, bulls jumped in to save the weekly candle on the benchmark S&P500 US stock index in dramatic fashion. It appears we may still trend higher into the 4200-4300 range in coming weeks.
Again I’ve been saying not to bet against stocks in a pre-election year.
Economic Calendar
Highlights
- CPI + Core CPI – Wednesday
- PPI – Thursday
Breakdown
CPI + Core CPI – Wednesday
The trends in both CPI and core CPI have been strongly downward over the past several months, although March saw a small uptick in core. April forecasts show both essentially hitting the same levels as March.
Further evidence of slowing inflation could reinforce expectations of a Federal Reserve pivot before the end of the year. If inflation remains sticky, the Fed may opt to leave interest rates higher for longer.
Expectations have been rising for the Fed to cut interest rates, with the chance of a 25-basis point cut currently priced at 36% for July and 51% for September per Fed funds futures.
PPI – Thursday
According to Investopedia, Producer Price Index (PPI) serves as a leading indicator for the CPI, and when producers face input inflation, this leads to increases in production costs which are passed on to retailers and consumers. PPI also serves as a pure measure of output since it is not affected by consumer demand.
PPI has been absolutely collapsing, from around 9% at the start of 2022 to 3.4% in March. It is forecast to continue that trend with a downtick to 3.3% in April. Longer-term, the chart indicates it should have no trouble reverting to around 2%. This is good news for consumers and should continue to put downward pressure on CPI in the months ahead.
Earnings
Here’s the earnings to look out for this week. PayPal and Disney stand out.
That’s all for today. Have a great week!
Jay Charles
Editor in Chief, The Trading Tank.
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