The jobs report shows limited impact from Fed hikes … but Wall Street decides to party anyway … Louis Navellier and the “manic” market … can we really count on a June pause?
Last Friday’s market rally was…well, silly.
Yes, that’s not exactly “Shakespearian” in its eloquence, but I stand by it. To begin unpacking why, here’s legendary investor Louis Navellier from last Friday’s Special Market Update podcast from Accelerated Profits:Well, the payroll report is out and it was a little confusing because March and February payrolls were revised down by a combined 149,000 jobs.
But the April payroll number came in much stronger than expected. And as a result, the unemployment rate fell from 3.6% to 3.4%, wages grew at almost the fastest pace in a year, and because of falling unemployment and wage growth, it’s indicative of a robust economy. So, the financial markets responded positively to this.Wait – huh? The financial markets responded positively?
Let’s analyze the absurdity. First, filling in a few of the labor market report details, estimates for last Friday’s nonfarm payrolls report were 180,000. The real number was an explosive 253,000 (which to be fair, we should expect to be adjusted lower next month if history repeats itself). This strength pushed the unemployment rate down from 3.6% to 3.4%, which ties the lowest level in more than five decades.![Chart showing the unemployment rate since the late 1960s. The current level is tied for the low since 1969](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Meanwhile, average hourly earnings rose 0.5% for the month and climbed 4.4% year-over-year – both were higher than expected.
Yet in the face of this eye-popping strength, the stock market exploded higher, with the Nasdaq leading the charge, up over 2%.The glaring disconnect between this invincible labor market and Friday’s stock market reaction is laughable
Wall Street is desperate for the Fed to stop hiking rates and return to its dovish ways, hopefully, with rate cuts later this year (traders are now putting 70% odds on cuts by September).
But for this hawk-to-dove metamorphosis to occur, the economic data must prove to a skeptical Fed that its rate-hikes are, in fact, slowing the economy enough to return inflation to 2%. Powell spoke directly to this “data” orientation in his press conference last week:Looking ahead, we’ll take a data-dependent approach to determining the extent to which additional policy firming may be appropriate.
This is not a new stance. And as to which “data” the Fed monitors closely, well, Powell has been laser-focused on the labor market and wage growth for months.
As a reminder, here’s CNBC from after the Fed’s March meeting and rate hike:The reason for the continued inflation focus, more than anything else, was always in plain sight: the job market is still too hot and wage growth, while cooling, hasn’t cooled enough for comfort.
Fed Chair Powell’s focus on the labor market has been consistent in the months leading up to Wednesday’s rate hike decision, and when asked at the post-FOMC meeting press conference whether the central bank considered a pause in rate hikes given the concerns about global financial system fragility, his initial response went straight to the labor market. “Labor market data came in stronger than expected,” Powell said.Guess what – last Friday’s report showed that labor market data came in stronger than expected yet again…by a mile…and then another mile.
And even if that number is adjusted lower, don’t overlook the spike in wage gains
Here’s Reuters making the point that Wall Street apparently doesn’t want to look at:
Average hourly earnings gained 0.5% last month after advancing 0.3% in March. Wages increased 4.4% on a year-on-year basis in April after climbing 4.3% in March…
Wage growth remains too strong to be consistent with the Fed’s 2% inflation target.If we lived in a logical world, Wall Street would have spent last Friday on its knees, wailing in despair based on this horrendously-strong report. Meanwhile, Fed Chair Powell would have likely gulped down a stiff drink, regretting his dalliance with dovishness from earlier in the week.
Here’s Reuters explaining why:…Sustained labor market strength [as evidenced by last Friday’s jobs report] could compel the Federal Reserve to keep interest rates higher for longer as it fights to bring inflation under control…
“The Fed may have been wrong to hint they were pausing their rate hikes, as there is absolutely zero evidence that the bank crisis is doing the work of monetary policy tightening that two or three more rate hikes could do,” said Christopher Rupkey, chief economist at FWDBONDS in New York.But instead of selling off last Friday, the markets erupted higher, with the Nasdaq leading the way, up 2.25%. It was illogical.
Let’s return to Louis:So, let’s just take a step back.
[Last Tuesday], everybody thought the world was ending. We were falling into a recession, banks would systematically fail, and Jerome Powell’s press conference on Wednesday didn’t fix that. Everybody was very bearish on Tuesday, Wednesday, and somewhat on Thursday. [On Friday], everybody is all happy again, as if nothing ever happened. Now, I realize markets are manic. And I realize the market is a crowd, and crowds aren’t smart, but… [as of last Friday], everyone thinks the world is growing. A few days [earlier], they thought the world was ending.So, what was last Friday’s market celebration about then?a special live event to discuss what’s happening in the banking sector. Louis is a former bank regulator, and he believes you’re not getting the full story about what’s happening right now. He’s going to discuss three things to do with your money immediately to make sure you’re protected from further bank fallout. Click here to reserve your seat.)
Well, you can point toward Apple’s good earnings report, or possibly a relief rally based on ebbing banking fears (JPMorgan upgraded a handful of regional banks stocks, calling them “substantially mispriced”). But it was most certainly not a logical response to what should have been the day’s focus – the labor report. (Speaking of “bank fears,” a reminder to join Louis tomorrow at 7 PM ET forSo, how do we cut through inconsistent economic data and the manic market to make wise investment decisions?
Let’s make things as simple as we can…
The Fed holds the stock market’s fate in its hands. Specifically, if the Fed turns dovish, the market will celebrate. If the Fed remains hawkish, the market will throw a disappointed tantrum. Keep in mind, it’s not just a rate “pause” that the bulls need. It’s a pause, then cuts. If the Fed Funds rate just hangs out at 5.00% to 5.25% for the rest of the year, the economy will suffer greatly. Meanwhile, the Fed has repeated – ad nauseum – that data will drive its policy decisions. Though there’s plenty of data suggesting the Fed’s ant-inflation efforts have begun to work, two of the most important measures the Fed watches – the unemployment rate and wage gains – just posted awful results if we’re looking for evidence of a slowing economy. Even if we assume the Fed pauses rate hikes next month (which the market overwhelmingly believes is a done deal) the idea of rate cuts in 2023 requires Powell and the various Fed presidents to be lying through their teeth. They have said, repeatedly, no rate cuts are coming anytime soon. On that note, here’s Powell from last Wednesday: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.
And here’s Atlanta Federal Reserve President Raphael Bostic from less than three weeks ago:
If the data come in as I expect, we will be able to hold [interest rates at the level of 5.00% – 5.25%] for quite some time.
Once we get to that point, I don’t have us really doing anything but monitoring the economy for the rest of this year and into 2024.And yet, as we noted earlier in this Digest, the CME Group’s FedWatch Tool shows that Wall Street traders put the odds of rate-cuts by December at 99.6%.
We can explain this rate-cut certainty in one of two ways
One, Wall Street thinks the Fed is bluffing.
For this to be true, show me one time over the last 12 months – just once – in which the Fed bluffed. It doesn’t exist. Expecting them to start now is a huge gamble that’s inconsistent with how the Fed has behaved for over a year. The second explanation for 99% rate-cut certainty is the Fed will be forced to cut because of a recession that demands accommodative policy. That’s more likely. But does that environment sound ripe for a rip-roaring bull market? I want a dovish Fed like everyone else. But if the labor market data and wage gains are behind much of the Fed’s interest rate policy – as we know they are – then last Friday’s jobs report wasn’t good news, and an ebullient stock market was, well…silly. The next piece of significant inflation data we’ll get is the Consumer Price Index on Wednesday. Cross your fingers and hold your breath for a drastic drop in the headline number that will offset last Friday’s shocking labor market strength… You can be sure that’s what Powell is doing. Have a good evening, Jeff Remsburg