Siebert Financial Corporation
12/02/2024 | Press release | Distributed by Public on 12/02/2024 06:13
Jobs Week: Will the Fed’s Balancing Act Hold
As the Fed watches closely, labor market data could change everything. Stay ahead with the insights shaping this critical week.
The other side of the token. In this past week of trading, one couldn't help but notice that some of the post-election exuberance was being challenged by some more traditional trading strategies. Remember that chart that I recently added to my daily chart-book where I track all the sectors' daily performances since early October? I picked early October for a starting date because that was when polling and betting data started showing Trump with some positive momentum and markets began to take notice. Well, let's start with a quick look at that chart to start things off.
Notable on this chart is how Financials continued their upswing as traders confirmed their initial assessment that the sector would benefit from deregulation, increased transaction revenues, and lower interest rates. While the same appears to be the case for Consumer Discretionary, it must be noted that the sector includes Tesla which is on its own journey and apparently still taking its victory lap from the election results. In other words, we can't learn anything from the sector move at this point, because it is distorted by Tesla's recent gains. Next, we note how Information Technology has been completely lackluster in the wake of Trump's win. This has less to do with any of Trump's potentially negative policy impacts and more to do with the fact that investors have put their AI exuberance on the back burner in order to focus on near-term opportunistic sectors which would clearly benefit from expected Trump policies. Put a placeholder on the IT sector, it will be moved to front burner again soon . Finally, we should note the bottom of the chart; you know, the losers' section. Healthcare was already under pressure as election day rolled in. The growing probability of a red wave painted uncertainty for the sector, which has been a longtime target of Republicans and the President-elect. That uncertainty was only amplified after the election as Robert F. Kennedy Jr. became Trump's nominee for Secretary of Health and Human Services. Known for some of his more extreme opinions on things like vaccines and so-called obesity drugs, his appointment news simply compounded the negative sentiment toward the sector. Interestingly, the sector has experienced a recognizable bounce in the recent sessions. This is a sure sign that investors were looking to take advantage of the oversold conditions which resulted from the knee-jerk reaction to Kennedy's nomination. The bottom line with the past week or so of trade, is that rationality is slowly returning to the markets, and we can expect to see the emergence of some more sustainable trends in the coming weeks.
But what about the week that lies just ahead? Last week we got the latest GDP revision along with the Fed's preferred gauge of inflation the PCE Price Index. That number showed that top line inflation crept up slightly last month and confirmed a similar move in the Consumer Price Index / CPI. According to those readings it is clear that disinflation, or slowing inflation, is stalled and that sticky inflation remains - well, sticky. The stickiness continues to come from services inflation with an emphasis on housing inflation. The numbers came in solidly in line with economists' estimates. So, no real surprises. That brings us to the next question, which is how the Fed will respond to recent economic numbers, specifically, this last read of inflation.
Markets have been factoring in a shallower rate cut path over the past few weeks in response to strong economic data and a bit of Fed speaker rhetoric, along with the aforementioned, still-not-low-enough inflation. Just last week, the Fed released the minutes from its last FOMC meeting, and we got to learn a few things . The Fed seems pretty confident that disinflationary trends would continue in the direction of its 2% target. On the other side of the Fed's dual mandate is the labor market. While the Fed did not express any immediate concerns, it did acknowledge that recent changes along with future challenges associated with immigration are items to keep an eye on. We won't touch that one today, but you can be rest assured that it will be a hot topic starting January 21st (the day after inauguration). Based on the minutes, it would seem that the Fed will remain vigilant but believes that there are no imminent risks on the horizon. In other words, we learned nothing new. A good analogy is to think of the Fed's dual mandate as being a coin with one side containing inflation concerns and the other side containing labor market concerns. That coin seems to be balancing on its edge at the moment ready to be pushed quickly to either side if there are any significant developments. Falling to one side can see rate cuts taken off the table completely while the other side may mean more aggressive cuts.
The week ahead is jobs week, full of many of those potential "developments," so what can we expect? All the action starts on Tuesday Morning when we will get the Job Opening Labor Turnover Survey (JOLTS) from The Bureau of Labor Statistics. This survey tracks job vacancies across industries. This series doesn't get much fanfare from the press, but it is, in fact, closely watched by the Fed. Remember supply and demand? It works in the labor market as well. When there is high demand for laborers (high JOLTS numbers), prices, or in this case, wages go up, and wage inflation is one of the key drivers of overall inflation. So, yeah, pay attention to this one. Just take a quick look at the following chart of JOLTS since the Fed began to raise interest rates in 2022. You can see clearly how job openings declined since. That is a sign of a softening labor market, which an inflation-fighting Fed would like to see. Check it out and keep reading. Be patient, this is important.
That's right, we went from 12.2 million job openings to around 7.4 million. This week, economists are expecting that number to remain around 7.5 million for September (the release lags, unfortunately, but the trend is important). So, we know that the Fed was hoping for the labor market to slacken a bit to help inflation ease. But we know that the real challenge is to avoid restricting it so much that it causes the overall economy to weaken. Remember that companies typically slow down hiring before they start laying off workers, so JOLTS can be very informative on what may come next.
On Friday, we will get the highly watched monthly employment numbers from the Bureau of Labor Statistics. The top line numbers for that release are Additions to Nonfarm Payrolls and the Unemployment Rate. On Thursday, we get a weekly Initial Jobless Claims number from the Department of Labor, which can give us some timely, and leading information on the health of the labor market. This series details the number of newly filed unemployment claims. While the absolute number of claims is important, it is the trend of the claims that gives us some interesting insight. Check out the following chart of weekly Initial Jobless Claims and keep reading. Stay strong, we are almost there.
On this chart, we note how first-time claims picked up earlier in 2023 sending the Fed a signal that the labor market was weakening. You can see how actual weekly claims (black line) were, for the most part, above its 4-week moving average (green-dashed line) indicating a clearly increasing trend. That increasing trend, starting in January of this year, may have had something to do with the Fed cutting rates by a supersized 50 basis points in September. Let's step back for a second and have a look at the Unemployment Rate over the same period of time. Check it out.
On this chart, you can see how the Unemployment Rate has been on the climb, but how earlier in the year its rate of change increased. If you were an FOMC member tasked with maintaining a healthy labor market, wouldn't you be a bit… um, uneasy in late summer? I thought so. That likely also impacted the Fed's decision to start cutting rates with the 50 basis-point cut. Now, go back to the prior chart with weekly claims numbers. Can you see how the observations have been on a declining trend since September? Ignoring that big spike which resulted from the hurricanes, you should note how most of the data points were below the 4-week moving average, indicating a declining trend. STOP, think. This means that the labor market has been somewhat stronger recently. Since the spike high on both charts above, the Fed has cut a total of 75 basis points and is expected to cut another 25 basis points in a few weeks.
When I say expected, I mean that the Fed Funds Futures put a 66% chance of a 25 basis-point rate cut, which, on Wall Street is considered good odds. All of these numbers above are going to be updated to the latest in the days ahead. Can you see why those numbers are going to be watched quite closely. Will those weekly trends continue to show a strengthening labor market? Will that be offset by a continued decline in Job Openings? How about the unemployment rate, will it stay at 4.1% as expected? You can bet that the Fed will be watching those trends really carefully, and that they will have an impact on the Fed's rate decision in a few weeks.
Finally, I want to leave you with two parting thoughts. First, some of the absolute numbers like Nonfarm Payrolls can be affected by a backfilling of the unemployment spike from hurricanes and strike resolutions, so the numbers must be carefully scrutinized. Second, the Fed likes to look at the ratio between job openings and unemployed workers to gauge labor market health. Based on the last round of numbers, that ratio is around 1.08. That means that there are 1.08 jobs available for each unemployed person. Back at the height of inflation, that same ratio was around 1.87, which the Fed assessed as being a tight labor market. Remember, when unemployed workers have lots of choices, they demand higher wages. So, it is clear that the Fed has accomplished its goal of weakening the labor market. In an attempt to keep it from deteriorating further, the Fed lifted its foot off the brake starting last September. What it does with that foot going forward, and which way the on-edge coin falls, will certainly be influenced by the raft of employment numbers we get in the days ahead. Pay attention. The Fed is.
FRIDAY'S MARKETS
Stocks continued their climb in Friday's abridged session carried higher by momentum. The S&P500 logged its largest 2023 monthly gain propelled higher by strong earnings and post-election exuberance. The week ahead is full of potential reality checks as we get ever closer to the next FOMC meeting just 3 weeks away.
NEXT UP
- ISM Manufacturing (November) may have improved to 47.6 from 46.5. An improvement here would be welcomed as the number has been under pressure and under 50 (indicating contraction) for all but one month since October of 2022.
- Construction Spending (October) is expected to have gained by 0.2% after inching up by 0.1% in September.
- Fed speakers: Waller and Williams.
- Later in the week we will get JOLTS Job Openings, ADP Employment Change, Factory Orders, ISM Services Index, Fed Beige Book, and University of Michigan Sentiment. The main act will be the monthly employment numbers on Friday. We will also get a number of important earnings announcements. Download the attached calendars for times and details. While you are at it check out my daily chartbook which I craft for you daily (as its name implies) by hand, so you have the upper… hand.
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