Good Thursday Afternoon,
Be careful here!
Bonds are pulling back as expected because that is what happens when you test and fail at the top or bottom of a range. The question now is how far will the pullback take us? It is possible that we may retest the 23.6% Fibonacci level but this will depend on tomorrow’s Non-farm payroll numbers. IF they come in as hot as this morning’s ADP employment report, we will likely see a much larger pullback. It is tough to float into a jobs report.
Here is a good primer for tomorrow from Bloomberg (the jobs report is super important to everyone, most importantly the Fed:
Yesterday, The Fed underlined its determination to stamp out inflation in the minutes released for the December meeting of the FOMC. Officials noted that a “misperception” of the Fed’s reaction function would complicate the bank’s goal of restoring price stability. While official data still seem to indicate a strong US jobs market — with job openings beating expectations and more readings due from ADP today and the BLS tomorrow — anecdotal evidence suggests a pocket of weakness in tech. Amazon is laying off more than 18,000 employees — the biggest reduction in its history. And Salesforce will cut about 10% of its workforce because it said it hired too many people during the pandemic. The cracks in the labor market are starting to show up in a bigger way.
Tomorrow we get the December non-farm payrolls. But for the moment let’s look backwards to yesterday, because there were a few interesting data points. First and foremost, we got the latest JOLTS report. In the old days, JOLTS (The Job Openings and Labor Turnover Survey) seemed like kind of an intellectual curiosity. You know, something for the economists among us. But these days, it’s become Top Shelf data, because the Fed has put such a high emphasis on job openings as an important indicator of labor market tightness. Well, job openings in November came in at 10.4 million, well above the 10 million that were expected. The prior month was also revised higher. Stocks immediately fell on the news.
Also within the JOLTS report, we got news that the Quits rate actually ticked higher, which again, is a sign that workers feel good about the state of the labor market. One of my favorite charts, which I’ve probably posted a few dozen times, is the Quits Rate vs. the Labor Differential Index of the Conference Board Consumer Confidence survey. One is hard data (the % of workers who quit) while the other is a sentiment measure (basically asking workers how they feel about the labor market). And yet the two lines move together really nicely. Both saw a jump in their latest reading.
In other words, from the point of view of workers, things seem good.
That was also confirmed in the latest ISM Manufacturing report. Most of the numbers in the report were negative (indicating contraction) but the Employment Sub-Index went back into expansion. More good jobs news. On the other hand, the ISM Prices Paid index fell from 43.0 to 39.4. That was the first sub-40 reading since the spring of 2020.
Of course, the question is whether declining wholesale prices paid by manufacturing companies translates into lower prices passed along to end consumers. (Speaking of falling wholesale prices, check out today’s Odd Lots podcast with Ryan Petersen, the Co-CEO of Flex port. He talks about a “great recession” that’s come to the ocean freight business).
This of course, returns us to the core question of the inflation debate. Will inflation fall due to “normalization” of the economy, or do we need to see a significantly weakening labor market to get inflation back down? That remains the multi-trillion dollar question. And for now it remains unresolved. It won’t be resolved until either the unemployment rate actually spikes or we see a sustained period of lower prices.
Meanwhile, speaking of economic strength, we also got strong car sales in December. GM and Toyota are seeing “surging” demand in the US, according to figures reported yesterday.
There’s a lot of talk about recession risk. And of course it’s possible. But just looking at the latest batch of numbers, it still looks like a robust consumer and a robust jobs market. Oh, and while we’re here, here’s the Johnson Redbook Same Store Sales Weekly Number, along with the 13-week moving average. The number has definitely come way down from the intensity of early 2022 and 2021. But overall growth is still way faster than pre-pandemic, and in fact the last few weeks have seen a nice uptick.
Please let me know if you have any questions and if I can help with anything at all.
Please remain safe and healthy.