Good Morning on this best day of the week, Wednesday,
So much on the plate today that I won’t be able to touch on so here are a few of those topics I am thinking about:
- Debt ceiling quickly approaching.
- Jobs are cooling. Yesterday’s jolts report was an eye opener. More fired than expected, fewer hired, and fewer available jobs.
- Regional banks are in trouble. Many have too many uninsured accounts which will cause scared depositors to pull their money for safer options. Credit is tightening and that is a problem for small and midsize companies who need to borrow.
That said, it is a big day today. The 10-year is down to 3.38, which is a big move from yesterday running up and testing 3.60. The next level to test would typically be the 200-day moving average which has a low of 3.25. Typically, though is not on a Fed day. We have already had ADP payroll data which blew past expectations (double 296K versus 148k) and the Institute for Supply Management Purchasing Manager’s Index came in slightly higher at 51.9 versus 51.8.
None of that mattered much to the markets as we are awaiting a Fed rate decision and commentary in about 60 minutes. Yes, today is Fed decision day and the market is expecting a 25-basis-point hike today and then hopefully a well communicated pause. My opinion (and that of several Fed officials) is the Fed should pause today, if for no other reasons than the previous nine hikes have not been fully felt in the economy, and we are already watching persistent financial market turmoil, following the collapse and buyout of First Republic Bank earlier this week. The economy is clearly stalling, and inflation will cool more meaningfully in the coming months.
How about this…
There are over 50 million people aged 28-38. Millions do not own homes yet; sure, some of them don’t want to own them, but millions do. There are currently only 562,000 active listings of houses for sale in the U.S. What? Buy the dip today!!!
And if you would like a little more on the Fed, below is a good primer:
Good morning and Happy Fed Day. The widespread expectation is that FOMC hikes rates by another 25 basis points today. After today is when the forecasts start to get more ambiguous, with some predicting that this will mark the end of the hiking cycle or that at least there will be some kind of pause after this.
Obviously it’s impossible to know, but there are some clear risks out there. The regional bank mess does not look over, at least judging by what the stock market is doing to some of these shares. It’s TBD what this means for financial stability and credit availability, but presumably it’s not good. Meanwhile, oil keeps plunging, which is at least a yellow light. Manufacturing surveys have all generally been ugly.
On the other hand, just to be clear, it’s definitely not all gloom. Again, housing seems very robust. Earnings season has been good. By and large, big consumer facing companies do not seem to be seeing much weakness.
All that out of the way, yesterday we got the latest JOLTS report for March, and the data clearly shows a labor market that’s coming off the boil.
Here’s the Quit Rate and total Job Openings, the two main measures from the report:
This is one of those things where the levels are still fine (both better than they were pre-pandemic) but also where the direction is towards a clear loosening of the labor market. Total job postings are coming down and by and large, people are quitting their jobs at a lower rate than they were a year or even 6 months ago.
Back in March, Senator Elizabeth Warren took a lot of heat for what I thought was a very legitimate line of questioning (YouTube clip here) to Chair Powell. I’m paraphrasing it, but the basic gist was: “Once the layoffs start gathering steam, why do you think they will be modest, and not spiral out of control?” As she rightly pointed out, history is not kind on this front. There are very few examples, if any, of modest increases in the unemployment rate. Modest increases have a history of becoming substantial increases. Weakness in labor leads to weakness in spending, which leads to weakness in labor, for reasons that are highly intuitive.
So going back to today. There is some negative momentum in the labor market, at least in the first or second derivative. Initial Jobless Claims have been picking up as well. We know there are those other clouds out there. So it will be interesting to hear from Powell about risk management. Inflation is definitely too high. That is front and center and that is why the overwhelming number of economists surveyed by Bloomberg are expecting a rate hike. But how is the Fed thinking about the risks that those clouds lead to a real storm? And at what point do those risks start to become front and center again is a key question for today.
Please remain safe and stay healthy, make today great. I will be back to you soon.