Investors Want to Hear Powell’s Thoughts on the Latest Employment Data

Investors are particularly nervous to hear the Fed chief’s thoughts on the latest employment data, which last week showed US payrolls grew by more than half a million in January as the unemployment rate fell to 53-year low.

Labor Market

That coincided with a gain in job openings back to 1.9 per every unemployed person. While the data might be good news to recession watchers, it is problematic for the Fed’s inflation fight as a tight labor market tends to keep wage gains elevated, in turn fueling inflation.

Atlanta Fed President Raphael Bostic yesterday warned that January’s strong jobs report raises the possibility that the central bank will need to increase interest rates higher than officials currently forecast. The Fed’s last “dot plot” showed policymakers were projecting a median terminal rate (where rate hikes will end) of 5.1%, which would amount to a target range of 5.0% to 5.25%. To get there, Wall Street is currently penciling two more 25-basis point rate hikes at both the March 21-22 and May 2-3 meetings (there is no Fed meeting in April).

Bostic noted that policy officials will first need to decide if the January job gains were an anomaly but said an additional hike beyond the two currently implied couldn’t be ruled out. There is one more round of monthly employment data before the Fed’s next meeting so if January’s gains were just a one-off, that could be revealed in the February Employment Situation on March 10. Bostic also reminded that even after the Fed pauses hikes, it could again choose to lift rates further if necessary.

Conclusion

Bottom line, the Fed is still in tightening mode and where it will end up remains a moving target. The high degree of Fed uncertainty is butting up against a disappointing Q4 earnings season that is prompting analysts to cut the outlooks for the quarters ahead.

According to FactSet, for Q1 2023 and Q2 2023, analysts are projecting earnings declines of -4.2% and -2.9%, respectively.

For what it’s worth, a hawkish Fed and declining earnings growth are not typically the recipe for a bull market. Earnings results are due today from AGCO, BP, Carlyle Group, Centene, Chipotle, DuPont de Nemours, Enphase Energy, Gartner, KKR & Co., Prudential Financial, Royal Caribbean, and Xylem. Economic data today is light with just the Trade Balance and Consumer Credit.