The Week Behind

Although all the majors ended the week in the red, the upward momentum and sentiment is still intact. CPI anxiety, which releases Tuesday morning, was likely the culprit for the trepid tape. However, nothing material changed. Assuming inflation data behaves, which I believe it will, I think the bulls will remain in charge until April. In April, conversation will shift to Q2 earnings and the adverse, albeit lagged, effect of Fed tightening. In a week where the bull market took a healthy breather, the DOW finished down 0.17%; the S&P 500 lost 1.11%; and the NASDAQ fell 2.41%.      

Highlights 

• To start the week, geopolitical risk was reintroduced into the market via the U.S. shooting down the Chinese espionage balloon. 
• On Tuesday at the Economic Club of Washington, despite January Payrolls, Powell reiterated the tone and message of his FOMC Press Conference.

Silicon Valley Layoffs have clearly Spread to the Rest of the Country 

The number of companies to announce layoffs or hiring freezes is showing no signs of slowing down. 

Once contained within software and technology, layoffs are beginning to spill over into other industries. In the last two weeks, Disney – an entertainment company, Dell – a hardware company, and IBM – a hardware and consulting company, announced layoffs. Mega-cap earnings confirmed layoffs were a response to weakened demand caused by Fed tightening. Now that companies outside of software are engaging in layoffs, it is fair to extrapolate that Fed-generated weakness is spreading to other sectors in the economy. 

While this development is worth monitoring, I am confident these layoffs are currently being offset by the record job creation in other sectors of the economy benefiting from government stimulus: traditional and green energy infrastructure, EV manufacturing, EV charging grid, and defense contracting (military). 

The Week Ahead

While there are still a lot of companies reporting earnings this week, the bellwether companies are mostly in the rear view. Given all the eco-data on this week’s agenda, it feels like a “macro” kind of week.

On Tuesday morning, CPI releases. Last month, headline was 6.5%. This time, analysts are projecting a 0.3% decrease with the expectation at 6.2%. For core, last month printed 5.7%. Analysts are expecting a 0.2% decrease; consensus is 5.5%. Focus will be on core. I expect the number to come in as expected or better. However, if core slightly misses and comes out at 5.6%, I do not think the market panics. While CPI is important, it really does not feel like the last few prints that generated Super Bowl levels of anticipation. 

On Wednesday, a wave of eco-data hits markets. Retail sales, empire state manufacturing, industrial production, capacity utilization, and NAHB homebuilders’ index release between 8:30AM and 10AM. Together, they will provide a mosaic on the economy, labor costs, and housing dynamics. 

Thursday, alongside weekly job data, important housing metrics via building permits and housing starts releases. Housing costs are a function of supply and demand. The more building permits and starts, the greater the future supply of housing. The greater the supply, the lower the costs. The Fed wants to see housing costs continue to come down. 

To recap: Tuesday – inflation; Wednesday – economic activity; Thursday – jobs and housing. The Fed is certainly paying attention, which is why we need to as well. 

Explaining Economic Fiction: Strong Job Growth without Strong Wage Pressure

In the last two Payrolls reports, the U.S. economy experienced strong job creation and decreasing wage pressure. Normally, strong job creation is met with strong wage pressure as employers compete with each other to hire and retain the best talent by offering better wage packages, raises, and benefits. However, we appear to have the former without the latter. Now, this is the best case scenario for the Fed and the stock market. These reports are what a “soft landing” or “no landing” scenario looks like. Instead of just hoping it continues, we should attempt to figure out why it is occurring to determine if it is a blip or something more sustainable.

While I took some economics classes in college, I am by no means an economist, which is a good thing. If I were an economist, I would always be wrong or too late. With that being said, take my theory with a grain of salt. It is not perfect, but I think it may explain the last two Payrolls reports.

In short, I think the layoffs concentrated in high-paying software and technology positions in conjunction with record job creation of relatively lower-paying infrastructure and defense jobs are offsetting each other. Despite a weakening macro forcing interest-rate sensitive software companies to layoff employees, government demand for infrastructure and defense is so great that it is forcing companies in these sectors to hire in numbers that far exceed those laid off: strong job creation. The reason wage pressure appears to be declining is because the salaries associated with the jobs created are lower than the salaries associated with the jobs lost: moderating wage pressure. It is hard to say if this trend can continue for this reason, but it is nonetheless comforting to have found a reasonable explanation.