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Markets: U.S. Jobs Report Exceeds Expectations. Now What?

Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

January 31–February 6

Apparently, “Milltown Mel” doesn’t deal with stress very well.

Sadly, Mel – a groundhog from Milltown, New Jersey – passed away mere hours before he was scheduled to make his annual appearance in the town square and, using only his shadow and his wits, tell the gathered crowd whether or not they would have to endure another six weeks of winter.

It’s hard not to be sympathetic. Like anyone who’s job involves trying to predict the future, Mel’s job has been complicated by all kinds of crosswinds over the last 18 months or so: is the pandemic over, or isn’t it? Is the economy booming, or stalling out? Are markets falling, or are they rising? Will the Fed raise rates a lot this year, or a whole lot?

It’s no wonder the poor guy couldn’t deal.

But what else does the untimely demise of an off-brand Punxatawny Phil (who is, let’s be honest, the more famous of the prognosticating pair of gophers by a wide margin) tell us about the current economic and market environment? Well, maybe not much. But there was still an interesting parallel between his ill-fated prediction-that-wasn’t and those of legions of economists who tried to forecast last week’s payroll numbers. While I doubt any economists dropped dead to avoid having to go on record with a prediction for 2022 like poor Mel did, some of them might have wished they had: nobody was even close.

Here’s how it broke down. On average, economists had expected the US to have created around 125,000 jobs in January. Even the most optimistic of them expected “only” 250,000, but what they got instead was nearly twice that:  467,000 new jobs (and a massive upward revision of November and December’s numbers, too[1].)  But the economists could probably be forgiven for their pessimism, because just two days before, payroll processing firm ADP released a stinker of a report that suggested payroll employment in the US had actually fallen by 301,000[2], missing economist estimates on the downside by almost as much as Friday’s payroll numbers from the BLS missed on the upside.

So what’s going on? Well, the January payroll data from the BLS was distorted by an annual benchmarking process that may have tinkered with the numbers by more than just a little bit. (You can find the technical note here.[3]) But revised or not, if you’ve been a consistent reader of this update (or, if for some reason you actively follow payroll numbers on your own), you’ll likely know that economists have been really, really bad at forecasting payrolls of late, missing to the downside month after month during the depths of the pandemic, only to be surprised on the upside on the way out. ADP, too, has been uncharacteristically out of sync with the BLS’ official tally. While there’s always some dispersion between the two estimates, during COVID they haven’t lined up very well at all.

It may not matter. While the jobs market remains perhaps the biggest COVID-spawned disconnect this side of “supply chain stress,” and while the forecasting payrolls during a pandemic apparently carries a higher degree of difficulty than a Chloe Kim frontside double-cork 1080[4], progress on the jobs front is clearly being made. But leaving aside the dueling payroll numbers for a moment, more evidence of that progress came last week from the so-called JOLTS survey, which showed the quits rate stabilized near its all-time high of 2.9% in December[5], while the number of layoffs hovered near historic lows in January (and were dominated this month by companies shedding workers who refused to get vaccinated[6].)

Taken together, those last two data points suggest a very strong labor market where workers aren’t afraid to leave their jobs but employers are afraid to lay anyone off who isn’t a legitimate threat to make them ill. Payrolls, shmayrolls: it looks like Jay Powell was being honest during his post-FOMC press conference when he told us all that the jobs market is very, very strong.

That message didn’t escape the markets’ notice, either. Stock markets generally strengthened last week despite a few really volatile days that saw the Nasdaq composite gain more than 3% on Monday and lose more than 3% on Thursday before bouncing back on Friday in a payrolls-inspired bump. Other segments of the market weren’t quite as nutty, but there is no longer much doubt that the days of relative solitude for stock market watchers are gone, at least for a while.

Bonds were not quite so fickle: they made up their mind about rates early last week and never really changed direction. Ten-year treasury yields ended the week 0.14% higher than where they began and Friday’s post-payroll performance accounted for more than half of that move as traders once again reset expectations about how willing the Fed might be to deal aggressively with all this inflation now that the jobs market is certifiably strong.

And in the UK, where inflation is almost as scary as it is here at home, the Bank of England gave us all a potential glimpse of Christmases yet to come when it raised rates by a quarter-point on Thursday. That by itself wasn’t unexpected, but the vote was: four of the nine committee members voted against the decision, not because they disagreed with the decision to raise rates, but because they wanted to go further and boost rates by half a percent[7]. Moreover, the BoE also voted to end dividend reinvestments for bonds it still holds, to quit buying corporate bonds and to begin selling down its portfolio – in effect, a triple-whammy of tightening that’s sure to raise a few eyebrows at home as a potential road map for if and when the Fed really starts worrying about price stability.

But let’s switch gears now and look at an area of the economy where progress is perhaps not being made – PMIs. Last week’s PMI composite came in about where it was expected to, as a surging omicron left its mark on services-related businesses even as manufacturers continued to thrive[8]. In both cases, though, business is expanding at a much softer rate than even a few months ago and not all the trouble can be pinned on omicron. Rising rates, still-rising input prices, supply chain stress, labor market tightness and emerging questions about the sustainability of demand are all reasons that economic growth might be slowing significantly here and in the near future.

Finally, a comment about earnings. It should almost always be the case that a company’s fundamental ability to earn and grow its bottom line should drive its stock price. But we all know that’s not always true, at least not in the short-term. (In fact, it wouldn’t be too hard to argue that the market’s almost other-worldly strength throughout the pandemic was a great example of stocks trading on something other than fundamentals.) But the “good” news (can we call it that?) might be that this era of prices running ahead of fundamentals may be coming to an end. Witness Meta Platforms (nee Facebook) and its performance relative to the other two FAANGs that reported earnings last week, Alphabet (Google) and Amazon. The latter two crushed estimates and were rewarded with index-beating performance, while Meta/Facebook missed and guided future quarters lower. That spurred a huge gap lower in the stock’s price and wiped out more market value than any other single event in market history, according to one interpretation[9].

And we’re only about halfway through earnings season. Maybe poor Milltown Mel had the right idea after all.

What to Watch This Week

February 7- 13

Notable economic events (February 7-11)

Monday: No planned economic releases

Tuesday: NFIB small business confidence; earnings: BABA, PFE, HOG, YUM

Wednesday: Wholesale inventories; earnings: DIS, Toyota

Thursday: CPI, weekly unemployment claims; earnings: KO, PEP, K

Friday: UofM Consumer Sentiment

It wasn’t too many months ago that I remember writing that you could probably ignore that particular month’s CPI release given it’s almost complete inability to influence the market narrative. And that used to make sense: for literally years, when inflation was running below 2%, the Bureau of Labor Statistics could have released its monthly report on pink parchment paper alongside warnings that North Korea had test-fired a missile bound for Honolulu and hardly anyone would’ve noticed. But today, it’s a sure sign of how freaky things have become when top billing among the month’s economic releases goes to CPI, the once-ignored measure of inflation at the consumer level, and wonks like me are telling you not to read too much into a huge payrolls beat in last week’s data. Oh, how times have changed.

If you haven’t guessed, Wednesday’s CPI release is this week’s main event from an economic perspective. Wanna know how you can tell? It won’t be just economists and the hair-dos on CNBC stressing over it, you’ll probably see coverage on the Today Show, the Tonight Show and maybe even The View. Inflation has gone mainstream.

But beyond that, we really won’t have too much to chew on this week: a pair of confidence surveys (NFIB’s small business confidence survey on Tuesday and the University of Michigan’s mid-month read on consumer attitudes on Friday), and that’s about it. More time to watch the Olympics and stress over inflation and the Ukraine, I guess…

Still, confidence measures like the NFIB and the UofM are crucial to understanding where the economy might go from here. While its always important to the future health of the economy that businesses and customers maintain a positive attitude, it’s even more critical at points of economic inflection. And a growing body of influences – CPI among them – suggests that that’s exactly where we’re at.

Finally, let’s close with a quick review of who’s on the earnings dais this week. There are a lot: more than 200 planned each day on Wednesday and Thursday, with almost that many planned for Tuesday as well[10]. With all the FAANGs out of the way (see above for detail,) earnings season is becoming more of a smorgasbord, with something for literally everyone. Interested in how vaccines translate into earnings? Tune in for Pfizer on Tuesday. Curious about how many older dudes cashed their stimulus checks and ran straight to the Harley dealership last year? HOG reports on Tuesday, too. Toyota, Ali Baba and Disney are also on the list of companies that could grab attention with their quarterly reports this week.

But in terms of broad, macro-related trends, attention will shift toward the more mundane, including an entire range of consumer staples companies. It almost seems like we might be entering a phase of the market cycle where companies like these matter more than fast-growing stocks like the FAANGs, with Pepsi and Coke (both on Thursday), as well as fast-food operator Yum Brands (Tuesday) now setting the tone. Of particular interest might be Kellogg’s (also Thursday), who in addition to selling the staple-est of all consumer staples – cereal – recently found its way out of one of the messiest labor disputes in a decade. Given ongoing tightness in the jobs market, labor disputes, like breakfast cereal, are becoming…well, a morning staple.

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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.

 

[1] https://www.bls.gov/news.release/empsit.nr0.htm; Estimates: Bloomberg

[2] https://adpemploymentreport.com/2022/January/NER/NER-January-2022.aspx

[3] www.bls.gov/web/empsit/cesbmart.htm

[4] YouTube it. It’s unreal.

[5] https://www.bls.gov/news.release/pdf/jolts.pdf.

[6] https://www.challengergray.com/blog/january-2022-challenger-job-cuts-report-cuts-remain-flat-most-due-to-vaccine-refusal/

[7] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/february-2022#:~:text=The%20Bank%20of%20England’s%20Monetary,percentage%20points%2C%20to%200.5%25.

[8] https://www.markiteconomics.com/Public/Home/PressRelease/2749313cb0624bd3a201ec015f6d6b83

[9] Bloomberg, 2/3/22

[10] Zacks.com

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