Yesterday was a real roller coaster of a session. It started with the major indices hesitant out of the gate, then moving high enough to create a sense the train was leaving the station. And then, tumbling hard on the Federal Open Market Committee (FOMC) minutes, which commentators deemed ‘more hawkish than anticipated.’

I’m not in that camp. However, the Fed will continue to lay it on thick because jawboning is their best tool, especially as they pull back the throttle on the size of rate hikes. On that score, Powell & Co. is struggling with messaging on how to be taken seriously as subsequent rate hikes are smaller, and eventually the Fed pausing.

The paragraph (below) focused on messaging. Essentially, even when the Fed isn’t barking, it’s growling and will bite if investors bid up assets. But that’s human nature. So, as data softens and rate hikes become smaller, how can investors resist, not at least nibbling?  The problem is bidding up stocks means easing financial conditions while the Fed is trying to tighten financial conditions.

I don’t know if I should say ‘good luck’ to the Fed trying to get people not to take the bait or ‘good luck’ to investors that might unleash the wrath of the Fed. That wrath has already resulted in the most aggressive hiking cycle in Fed history.

Participants reaffirmed their strong commitment to returning inflation to the Committee’s 2 percent objective. A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal or a judgment that inflation was already on a persistent downward path. Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability. Several participants commented that the medians of participants’ assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based _____________________________________________________________________________________________ Minutes of the Meeting of December 13–14, 2022 Page 9 measures of policy rate expectations, underscored the Committee’s strong commitment to returning inflation to its 2 percent goal.

Santa Made It

Well, it’s official that Santa made it to town. But recent history suggests after the brief visit from Saint Nick, it’s the Grinch who rules in January and often the entire first quarter.

It would have been a stronger session, but Microsoft (MSFT) caught a rare downgrade at the start of trading.

What’s Eating at the Market

Contrary to popular belief, I think the market is looking beyond inflation. I get the hawkish Fed minutes, and the lack of a collapse in the Jobs Openings and Labor Turnover Survey (JOLTS) as excuses but not the notion that the most powerful central bank in the world is relying on stale and flawed data to make life-or-death decisions.

Moreover, I continue to believe the financial media is getting it wrong. Yesterday, when a bunch of economic data was released, the initial market reaction saw indices edge higher. But after a couple of sips of coffee, they turned lower.

Why?

I heard the reason was the JOLTs report which eased a bit but not as much as the consensus estimate.  The difference was de-minimis, but more importantly, the nuance within the JOLTs report, which was not reported (probably not even read by those reporting it).

JOLTs

While openings remain higher in government than data from several private sources (some think for non-economic reasons), the key is the quits rate. Overall, the bounce to 3.0 from 2.9 doesn’t set off alarms, but the industry that saw the biggest spike does raise a red flag. Transportation, warehousing, and utility quits popped to 3.7 from 3.0 but stripping out utilities, the number surged to 3.9 from 2.9.

This is important because The Great Reshuffling saw a huge move from workers leaving retail and leisure to higher-paying transportation and warehousing jobs. If this is broken, it means even more pain for lower-income homes in the upcoming recession.

Migrating to Better Paying Jobs

Job switchers are still getting big bucks to make the move, but I think it’s peaked.

Recession

For me, the biggest news yesterday was the ‘prices paid’ component of the Institute for Supply Management (ISM) Manufacturing report. It’s come down significantly from the March 2022 high. 

Hence, at 39.4, prices declined much faster than the consensus of 42.6 and now reside at the lowest read since April 2020; more importantly, the pace of decline over the last nine months has only been matched twice before.

• 1975
• Global Financial Crisis

This is about a recession happening sooner rather than later. It’s not great news for Main Street, but it’s the only thing that will get the Fed to back off sooner rather than later. But remember, initially, the market stumbles into a recession because the economy is so screwed up that sales slow and profits fade. 

A lot of that is already priced into the market now. But the behavioral aspect of the market, which plays a much bigger role these days, points to knee-jerk moves to the downside.

Great stocks are down with not-so-great stocks. 

Portfolio Approach

We added a new position in Consumer Discretionary yesterday in our Hotline Model Portfolio.

Today’s Session

Both initial jobless claims and ADP employment came in better than expected (the only time the latter matters to some observers).

Initial Jobless Claims

Initial jobless claims at 204,000 down from 223,000 and below consensus of 225,000.

Continuing claims, which have been a real red flag, eased to 1.69 million from 1.72 million.

States with biggest increase, not surprisingly, are the states that are seeing largest exodus:

• New Jersey 4,200
• New York 3,400
• Michigan 3,200

ADP

The ADP number was compelling in the sense it was completely driven by small and midsized business, as large business lost 151,000.  A trend that only seems to be just beginning.

Overall, the 235,000 was well above 150,000 – but lot of very low paying jobs are setting the pace.

Equity futures edged a lower on the news but not shockingly so – but the question is what could turn it around.  These are the kinds of tests the market needs, but for far too long, they have been failing.

Comments

Would be interesting to know if those low paying jobs are second jobs, or part time work to supplement fixed income retirees? Cornelia on 1/5/2023 9:53:20 AM

Newt Gringrich Peter J.Normington on 1/5/2023 9:56:13 AM

Anyone who is a true conservative and not a career politician. McCarthy seems to think it's owed to him by default. Maybe he should show a little humility. Ken Terry on 1/5/2023 10:04:32 AM

The Republicans appear dysfunctional at this point. Seems to be a group of 20 causing the entire party to look weak. We need the Speaker sworn in and they need to get to work. McCarthy on 1/5/2023 10:27:06 AM

Isn't the FED-R also missing the impact of excessive government spending in their calculations? If I recall correctly, it typically represents about a 3rd of GDP. Not sure if this only applies to the US government or also includes state level spending as well. Perhaps a bit higher now? Has anyone ever created a GDP model that strips out the government's share for a clearer picture of what's going on elsewhere in the private sector and at the true consumer level? It might be almost impossible to do, but it would be interesting to see the numbers. Terry Dowler on 1/5/2023 10:35:49 AM

You just don't get it, do you? It's not about jobs, it's not about growth, it's not about the coming recession. It's about interest rates. With inflation not receding, interest rates must rise to beat inflation down. If inflation is not subdued, interest rates will continue to rise. If interest rates continue to rise, the interest on the National debt becomes unsustainable. If interest on the debt becomes unsustainable, the dollar collapses, the US becomes a bankrupt shell and the whole system is kaput. Simple as that. Interest rates must continue to rise until inflation is beaten. Charles A Haselberger on 1/5/2023 10:41:09 AM

Byron Donalds Griffith Harlow on 1/5/2023 10:41:45 AM

I would like to Steve Scalise as Speaker. William Hall on 1/5/2023 11:40:56 AM

Any of the following would be much better than McCarthy: Matt Gates, Donald J. Trump, Kari Lake. There are many other possibilities, but these would be AWESOME! Erika on 1/5/2023 1:52:25 PM

90+ % are for McCarthy Are they WRONG ? The individuals in opposition need to Compromise and get this stalemate over. Tom E Cook Sr on 1/5/2023 11:59:27 PM

I wish the 200 Would vote for Byron Donalds and Kevin McArthy would help him navigate the shark infested waters. We need someone who is not indebted to the lifelong congress members but we need someone with experience in the tricks they use. Donalds by accounts is a principled conservative and might go a little way toward cooling the racism claims against republicans. I feel that this may have been a show to keep the news from talking about Jan 6 th non-stop. Laura on 1/8/2023 1:24:43 PM

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