Fed “Pausing” Stocks
Bearish Sentiment Amid Volatility & Inflation:
Equity markets were modestly higher last week. The S&P 500 rose 1.19% on the week when it done. Intraweek volatility was caused by both economic data and the Federal Reserve itself.
This morning stocks in Asia are higher with strong gains in China equities. An apparent shift in China’s approach to the Covid virus is driving a continued rally in both mainland China and Hong Kong stocks. To put this in perspective, the MSCI Asia Country World index gained 1.3% last week.
The MSCI Emerging Markets index which has a huge China weighting is up 15% over the past month on hopes of China reopening.
There wasn’t much new in Fed Chair Powell’s speech last week. He did back the committee’s prior idea that slowing the pace of rate increases was forthcoming at the December meeting. The equity markets ran with it.
The lack of a hawkish tone was a relief to the market already high in bearish sentiment. Powell reiterated that rates still need to move higher.
Goods inflation is slowing, and housing inflation is heading lower. However, he cited services inflation as sticky dictated by a still-too-tight job market.
Powell believes the endgame for rates will be “somewhat higher” than assumed in the September forecast which was 4.5%-4.75%, and consistent with the current more hawkish market view. For the December meeting, Powell guided to a 50-basis point move.
On the data front, last Friday’s U.S. payroll employment rose by a stronger-than-expected 263k in November, leaving the three-month average at a 272k. The unemployment rate was steady, and wage growth accelerated to 5.1% y/y.
On the surface, this was not the data of a Fed pivot, however, things are not as clear behind the scenes. Here’s more detail from some more in-depth analysis of government data.
There are two surveys for jobs. The household job survey shows literally no jobs have been added since the end of the first quarter while the establishment survey shows 2.7 million jobs have been added. What’s the difference? How is that possible? The household survey counts a single person holding three jobs as one employed person.
The nonfarm payrolls survey released last Friday counts that same household situation as 3 jobs being created.
Over the last 12 months, in order to combat inflation, over 700k Americans have had to get a second or third job to pay bills. So that 272k Non-Farm Payrolls (NFP) number released last Friday, double and triple counts jobs the way move Americans think of them.
Moreover, the NFP survey makes use of huge statistical adjustments including the mind-numbingly impossible-to-understand “net business birth/death adjustment” while the Household survey doesn’t.
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