Back to the Drawing Board
The January nonfarm payroll number was a blockbuster employment number while the revisions to 2022 numbers added more strength to the labor market than what had been reported previously. Furthermore, the 3.4% rate of unemployment matched the rate of unemployment in May of 1969.
This report will send many economists, including us, back to the drawing board as we digest this January employment report and try to incorporate it into our GDP forecast, a forecast that we will have ready for next week.
What we can definitely conclude today is that Federal Reserve (Fed) Chairman Jerome Powell’s “a couple of more times” comment during the press conference after the Federal Open Market Committee decision on Wednesday of this week probably makes much more sense. Thus, we are changing our forecast for the federal funds rate terminal rate for this cycle from 4.75% to 5.00% to 5.00% to 5.25% because of the need to continue to put downward pressure on the U.S. labor market and slow service sector employment.
Furthermore, today’s Services PMI rebounded considerably compared to December’s print and continued to show a very strong U.S. service economy, in tune with today’s payroll employment number as well as with the initial unemployment claims number reported on Thursday. Thus, Chairman Powell’s concerns about upward inflationary pressures remaining worrisome for “core services excluding shelter” will remain top of mind for Fed officials going forward.
Having said this, we still believe that the upcoming slowdown in shelter cost that has been built into the pipeline and will start being felt later this year, will be enough to keep the Fed from overtightening too much and could give a bit more credence to current market expectations. However, we have to caution that in the current fight between the Fed and markets we still have the Fed winning this time around because of the characteristics of this inflationary cycle and because it remains very risk averse today compared to the recent past.
The Federal Reserve Delivers, Markets Rejoice… But Probably Not for Long
On Wednesday of this week the Fed delivered another 25 basis point increase in the federal funds rate to take the rate to 4.50% to 4.75% and while the statement from the Fed didn’t have a lot to hang on to, the press conference by Fed Chairman Powell seems to have gotten an A+ from markets as investors erased a very large drop in the stock market and ended the day close to even.
It is arguably very difficult to understand the reaction of markets after the Fed statement and the press conference, but what we know is that markets just don’t like uncertainty and hearing the Chairman of the Fed say that the institution may go at it again “a couple of more times” gave markets some certainty of a near-term end to this tightening cycle.
What was clear from the press conference was that Fed members and economists, while upbeat due to the disinflation they have observed since mid-2022, are still seeing sectors that are not following a disinflationary path. One such sector is ‘core services’ excluding shelter, which is still on an upward trend, and the Fed would like to see it trending down. To this end, the Fed feels that it has to continue to tighten or give what it calls ‘forward guidance’ that it is serious about those prices also coming down. This means that the Fed still has some work to do to convince the service side of the economy that it is on a mission.
Furthermore, the picture for monthly inflation in the first quarter of the year is still not pretty, as we will probably see January’s and perhaps February’s monthly inflation rates be much higher than what we have seen during the last several months and this may disappoint markets even as year-over-year rates will continue to disinflationary.
The IMF Updates Its World Economic Outlook: Slightly More Upbeat for 2023, Not so Much for 2024
The updated International Monetary Fund (IMF) World Economic Outlook (WEO) for January 2023 provides a slightly better picture for the global economy compared to the institution’s October 2022 forecast. Although the IMF WEO forecast is not very accurate because it is normally a lagging forecast, it gets lots of publicity in the media due to the importance of the institution and the fact that it gives a very comprehensive view of what is happening in the global economy. Furthermore, the WEO is free, and everybody has access to it, which makes it a good report, overall.
The January WEO update contains forecasts for 30 world economies, representing 83% of the global economic output. Perhaps the most salient aspect of the report is that most of the largest economies of the world, that is, the U.S., China, Germany, Brazil, Italy, Japan, Mexico, and Russia, received an improved forecast for 2023. But, of course, there is always a cost to the better news in 2023 and that is that 2024 growth rates for almost all of these large economies came down. That is, the IMF WEO forecast is expecting that the slowdown in global economic activity will be delayed somewhat in 2023 and will probably shift a bit to include a slightly weaker prospect for economic growth in 2024.
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
Leading Economic Index: The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non- governmental organization, which determines the value of the index from the values of ten key variables
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
FHFA House Price Index: The FHFA House Price Index is the nation’s only collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
Expectations Index: The Expectations Index is a component of the Consumer Confidence Index® (CCI), which is published each month by the Conference Board. The CCI reflects consumers' short-term—that is, six- month—outlook for, and sentiment about, the performance of the overall economy as it affects them.
Present Situation Index: The Present Situation Index is an indicator of consumer sentiment about current business and job market conditions. Combined with the Expectations Index, the Present Situation Index makes up the monthly Consumer Confidence Index.
Pending Home Sales Index: The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by
U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month.ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.
ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.
ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the
U.S. economy from month to month.
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Source: FactSet, data as of 12/29/2022