Conflicting jobs data … how will the Fed interpret it? … a big-picture view of inflation … the challenge of wage growth … this is a “structurally different market”
Is the jobs market red hot or not?The last two days have brought economic data that don’t line up perfectly.Thursday’s ADP jobs report that showed private sector jobs exploded by 497,000 in June. This was the biggest monthly gain since July 2022, blowing away the Dow Jones consensus estimate of 220,000.That’s about as “red hot” as it comes.But this morning’s nonfarm payrolls number showed a June increase of just 209,000. That was less than the consensus number of 240,000 and marked the slowest month for job creation since December of 2020.“Confusing” is how legendary investor Louis Navellier described it.Stepping back, 209,000 new jobs isn’t the same blowout number we saw on Thursday, but it could hardly be described as a “weak” jobs report.In fact, it’s not too strong…but not too weak…might we call it a Goldilocks report?Well, we might. But it’s not so much what we want to call it – it’s how the Fed will interpret it.
What will Federal Reserve Chairman Jerome Powell and Co. think about this week’s data?
At first blush, this week’s jobs data seems like it would be a good thing.After all, in recent months, we’ve had a wide array of economic reports showing that inflation is dropping thanks to the Fed’s rate hikes. Meanwhile, the potential collateral damage of those rate hikes – a stumbling economy (resulting in a recession) – appears nowhere in sight, as evidenced by Thursday’s explosive jobs numbers, followed up by this morning’s respectable-but-softer jobs numbers.So, we have crashing inflation happening alongside robust job growth – that seems like a dream Goldilocks scenario.But the question is whether the Fed views it that way, which will influence its rate-hike decision.As we address this question, let’s start with the “crashing inflation” part of it.
Inflation has fallen just about everywhere…except where the Fed wants it to fall
We’ve seen tremendous progress on inflation. This is manifesting in all sorts of economic numbers and data, from the Consumer Price Index, to the Producer Price Index, to various Fed manufacturing surveys, to falling home and apartment rental prices, you name it.The problem is that while the Fed is aware of this progress, it doesn’t view these reports as the most accurate reflection of the true state of inflation.For that, the Fed zeroes in on the Personal Consumption Expenditures (PCE) report – specifically, the Core PCE data, which strips out volatile food and energy prices.Last week, we received the latest Core PCE data. And as we covered here in the Digest , it remains stubbornly high – even though so many of the other inflation gauges have dropped substantially.To illustrate, below, we compare the Core PCE numbers and the headline Consumer Price Index (CPI) data going all the way back to November of 2021.Watch the CPI number (in orange) spike from about 4.8% in fall 2021, to more than 9% last summer, then crash to the current reading of just 4.05%.And then watch Core PCE data (in purple) do just about nothing (I’ve added a dotted flat-line to help you see this).
Core PCE has barely dropped since November of 2021.
Let’s get more granular, zeroing in on the last year
Below, we look at the Core PCE numbers (measured year-over-year) since last July.As you look at these data, can you make a strong case that the Fed’s preferred way of measuring inflation is dropping in a meaningful way?
- July 2022 – 4.6%
- August 2022 – 4.9%
- September 2022 – 5.1%
- October 2022 – 5.0%
- November 2022 – 4.7%
- December 2022 – 4.4%
- January 2023 – 4.7%
- February 2023 – 4.6%
- March 2023 – 4.6%
- April 2023 – 4.7%
- May 2023 (the latest from last week) – 4.6%
Bottom line: While Wall Street bulls may view the CPI data as evidence that inflation is head, the Fed views the Core PCE data as evidence that inflation is very much alive.If we accept this is how the Fed views things, then the next question is “so, what does the Fed blame for this high inflation?”And that points us to the labor market.
The Fed has been at war with the labor market for months
To help with context, let’s jump all the way back to the Fed’s interest rate hike in March.Here’s CNBC after that Fed decision to raise rates:
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.
Thursday’s jaw-dropping labor market data almost certainly “came in stronger” than Powell expected.And while we could argue that this morning’s cooler jobs data should offset the ADP strength, there’s the second problem that Powell referenced in his quote above – wage growth.While this morning’s data showed cooler jobs numbers, it brought hotter wage growth data.Average hourly earnings surprised estimates to the upside, increasing by 0.4% for the month (0.03% was expected). For the year, the number came in at 4.4%, also stronger than the estimate of 4.2%.It’s easier to see the wage growth problem visually. To help with this, let’s turn to the Atlanta Fed’s Wage Growth Tracker tool which shows the three-month moving average of median wage growth.As you can see, while there’s been progress on bringing wage growth down in recent months, the number still towers above long-term levels.
Between Thursday’s huge job numbers, this morning’s healthy jobs numbers, and this morning’s higher-than-expected wage growth data relative to how robust it’s been in recent months, what’s the Fed going to think?My money is on “raise rates.”Traders agree. The latest data from the CME Group’s FedWatch Tool puts the odds of a quarter-point hike later this month at 94.9%.Meanwhile, with yields jumping higher, the bond market also agrees.
The “smart money” is pricing in at least one more rate hike
The bond market has a reputation for being “the smart money.”Whether we want to give it that credit or not, we should at least evaluate its perspective. And right now, it’s looking at this week’s data and concluding “well, the Fed will have to keep hiking rates, so it’s time to readjust our own yields.”For these details, let’s go to Louis Navellier and yesterday’s Special Market Update podcast from Accelerated Profits:
We have surging market rates today…the highest treasury yields since October of 2022.The 10-year yield is above 4%. The two-year yield is above 5%.The Fed doesn’t like to fight market rates, so as of today, [Wall Street] now thinks the Fed is going to raise rates.
Louis updated his thoughts this morning with another Special Market podcast.Speaking to the confusing combination of the blowout ADP numbers juxtaposed against the cooler government numbers, he resolves the contradiction by pointing toward the bond market:
Treasury yields have not backed down.So as of today, and yesterday, it looks like the Fed will increase rates at its July FOMC meeting because market rates have risen.
So, in the face of yet another rate hike (probably) and climbing bond yields, why are stocks climbing today?
Simply put, because bullish sentiment has overtaken this market.Our hypergrowth expert Luke Lango captured this dynamic perfectly in his Daily Notes from Early Stage Investor yesterday:
This is a structurally different market than we had last year.In 2022, we had a bear market that wanted to go down. It barely budged on good news and plunged on bad news. In 2023, we have a bull market that wants to go up. It soars on good news, and barely budges on bad news. When you have a bull market that wants to go up, you buy all dips. That’s the winning strategy.
On that note, Luke has one corner of the market in his crosshairs right now that’s enjoying an extraordinary bull market. And thanks to AI, Luke believes the gains are about to snowball.Next Tuesday at 7 PM ET, Luke will be holding a special broadcast to explain what what’s going on. In short, these “Primed Stocks,” as he calls them, have already produced 47 triple digit winners in the past 6 months alone. We’ll bring you more details on this here in the Digest, but for now, just mark your calendar and click here to reserve your seat.Wrapping up, yes, it appears the Fed is likely to raise rates further, but it’s not slowing this bull. Join Luke on Tuesday to find out one corner of the market where the gains are piling up especially fast.Have a good evening,
Jeff Remsburg
