Baker Market Update
2023-02-03

This week Punxsutawney Phil was back at it again celebrating Groundhog Day with thousands in Pennsylvania on Thursday. Unfortunately for us, Phil saw his shadow and the prediction came with a massive winter storm that hit much of the US, causing at least 300,000 Texas residents (myself included) without power and forcing the cancellation of over 2,250 airline flights! What Phil didn’t know is that the financial markets were also in store for a busy week of predictions and prognostications as a slew of economic data was released along with the highly anticipated first Federal Open Market Committee for the year.

First, let’s knock out the weekly numbers. Looking at the bond market, yields took a 10 to 15 basis point round trip this week as the 2 Year T-Note yield started the week around 4.2%, dropped down to 4.1% during the middle of the week and have bounced back to 4.26% as of Friday morning. The 10 Year performed similar as it was 3.54% Monday traded down to around 3.38% Wednesday is now back to 3.54%. Given the parallel movement in rates the 2s-10s yield curve inversion remains approximately 70bps and continues to flash the warning signal of a slowdown in the economy. Speaking of the warning signals, Leading Economic Indicators (LEI) continues to slide as it has now fallen 10 consecutive months, we’ve never seen that stretch without economy already being in recession since it’s tracking since 1960. Turning to equities, all three major indices are looking to finish in the green this week. As of Friday, the S&P 500 is up approximately 2.50% over the last five trading days. The S&P remains up 8% YTD.

Now, let’s unpack some of the economic data that was released this week. First let’s start with the Consumer Confidence Index released on Tuesday. The Conference Board’s index slipped to 107.1 from 109.0 in December. While the overall index is bouncing around 100-110 the last 6 months, one key metric within the readings is the expectations index which is based on consumer’s short-term outlook for business and labor market conditions dropped to below 80 which is typically associated with a recession. Another set of key readings released this week was the ISM Manufacturing and ISM Services Indices. On Wednesday we saw the manufacturing index contract for a third month in a row coming in at 47.4 (above 50 indicates growth) and today the Services Index jumped up to 55.2 (from a 12 month low of 49.2 in December). Another interesting piece of data circling the news is that from the recent GDP readings from the Bureau of Economic Analysis for Q4 was the massive drop (over $1 trillion) in real disposable income which is the biggest decline since the great depression further pushing the recession stories out there. While the 2.9% increase in growth from 2.1% was an overall positive, this decline in real disposable income should have more alarm bells ringing.

Finally, the most important happenings this week: the FOMC Meeting and January jobs report. On Wednesday, as expected, the Federal Reserve raised the Fed Funds rate only 25bps points. The unanimous vote was another downshift in rate increase from 50bps that happened during the December meeting. There was a small, but important change to the language that indicated they are now focused on the “extent” of future rate increases rather than the “pace” of increases. This is a clear indication the FOMC is nearing the end of their tightening cycle and trying to determine the appropriate peak for Fed Funds rather than just how quickly they moved. Today, the labor market showed no signs of softening in January as job growth surged and the unemployment rate unexpectedly fell to the lowest level in 53 years at 3.4% (3.6% survey). Nonfarm payrolls soared to 517k, substantially higher than the 188k survey. The surprising strength of the January employment report will likely bolster the Fed’s resolve to continue hiking rates in the months ahead as Chairman Powell continues to acknowledge the jobs market is extremely tight and out of balance. The average hourly earnings component decelerated helping

Next week will be light on the data front. On Tuesday, the US Census Bureau will release figures behind the current US Trade deficit and on Wednesday they will give us the figures related to wholesale inventories. On Thursday we’ll get weekly initial jobless claims and on Friday we will see the University of Michigan release their Surveys of Consumers (Sentiment and Conditions).
Happy Groundhog Day and Stay Warm out there!

Average Hourly Earnings

Good sign on the inflationary front as average hourly earnings (AHE) came in 4.4% YoY and continues to trend lower. The Fed estimates 3 to 3.5% is consistent with an inflation target of 2% indicating there is still more work to be done on unwinding wage pressures.