Market Moment 12-1-2022

Market Moment Thursday December 1, 2022

November has shown a shift that was encouraging to the financial markets.

Fed Chair Powell spoke Wednesday at Brookings Institution and has not overtly changed his tone…. or has he? The same Fed Chair who had a completely different posture this time last year, along with all other Fed Members who didn’t touch interest rates or even hint at more than the prospect of an increase +0.25% (1/4 of 1%) for Fed Monetary Policy during 2022.  Fed Chair Powell and Committee have increased interest rates at a pace faster than any other time in the history of the Federal Reserve; ever.  Same group of Fed Officials…last year not a peep and today at the outer most fringes of Monetary Policy that rewrites the most aggressive “pace” of monetary tightening policy ever.  Listening to Powell speak Wednesday I did hear him say a couple interesting things that covertly suggested he feels different.  His points:

• October CPI was a welcome development. It came in below forecast.  He said the word “welcome.”  He specifically addressed the lower number and is applauding it.
• CPI Housing Rates are showing a trend of falling. He also stated that this component is the “stickiest” part of CPI (it’s the most lagging / aka…. it’s a data point that doesn’t provide real-time data).  This is an admission of the data’s inaccuracy of what is happening right now.

These two, small and nuanced points seem insignificant.  But the markets are laser focused on every single word that comes out of a FED Official and their rhetoric (as stated in numerous Market Moment’s previously) has really had as much (or more) impact on the markets than their actual interest rate policy.  This is a new era of communication for the FED, it’s contradictory in many cases, but it’s the only FED we have.  Regardless, the markets did respond favorably to Powell’s comments and stocks rose and bond yields fell.

Historically during bear markets, there arises something in the financial world that breaks.  It results from dislocations and price volatility that sends one part of the market into a condition that becomes damaged, and it infects other areas of the market.  In November we saw implosion and the destruction of many crypto market participants. Weather one believes in crypto currency, likes it, understands it…. or not…. it’s a financial instrument that is linked to other larger and deeper financial assets/markets.  Leverage within the crypto ecosystem created a chain reaction that caused an implosion that created a strain during November for the more established financial markets.  Crypto market participants felt excessive financial strain and they were forced to sell other financial assets unrelated to crypto to survive their crypto losses.   While no one wants anything to “break,” the act of something “breaking” is one of those signs that a bear market typically delivers and having it in the rear-view mirror is better than wondering what will break.

The S&P 500 will inflect upward as continuing inflation data shows inflation falling or inflating at a slower pace.  As pointed out in previous Market Moments, this has and continues to be an omni present condition and I expect the trend to continue.  As this data unfolds, there are technical factors (charts) that display sort of a “map” to how the market is responding.  There is a key technical indicator (like a direction in a road map) referred to as the 200 Day Moving Average Trend Line.  Obvious, this line has been down since the start of 2022.  However, it just pierced above this trend line for the first time since March 2022.  Combine this with Powell’s comment, lower inflation data and you end up with positive month for the stock markets.  For November: S&P 500 +5.6%, DJIA +6.0%, NASDAQ 100 +5.6%.

And finally, good news is bad news…or is it?  The November Employment Data was just released.  As you read this, understand that your reaction to people “seeking jobs and getting jobs” is good (you are not wrong).  Productive people are good for their households along with our economy.  However, the FED (and by proxy…the markets) will not view this favorably (for now).  The unemployment rate didn’t change and stayed at 3.7%; the FED would prefer this rate be higher to show that the economy is slowing.  November Non-Farm Payrolls came in at 263,000 new jobs and the projection was for 200,000.  Yes…more jobs are better for humans, but the FED (secretly) does not like more jobs.  The more overt point that the FED will talk about is the Average Hourly Earnings pay rate coming in at +0.6% vs the +0.3% estimate.  Yes, this increase is fractional but is on this granular level, double what was expected.  However, and the media will burry this point.  These figures are routinely “revised” and if you listen to the hype shows on TV, you’ll miss this point.  September Non-Farm Payrolls (the figure reported last month) came in at +315,000 at the time it was reported.  The Market and Reporters went bananas.  Don’t look now…but that figure was just revised to +269,000 (or 46,000 fewer jobs).   As I write this, I watched the market “freak out” prior to the market open, it’s tempered its freakishness (not sure that’s a word) since the open and at some point, this will be used as empirical evidence for Jerome Powell to continue talking tough about inflation (he’ll disregard the cooler September number I just pointed out). What does this mean?

• The Fed will meet on December 14^th, and they will raise rates. Will it be 0.75bps or 0.50bps?  I’m not sure right now as there will be more data over the next 2 weeks.  But it is viewed that this will be the final LARGE hike (a good thing) adding to their historic pace that wasn’t even in their calculus this time last year.
• This jobs data I just shared… If we see inflation data falling in aggregate and we still have people working (getting jobs) in aggregate, then this is the recipe for what is called a “soft landing.”  Soft meaning the FED successfully slows down inflation (the economy) without sending massive numbers of people to the unemployment line.

Enjoy the Holiday Season!