It has been a turbulent week…
Price of gasoline rose to the highest since 2014 at $3.43/gallon. Brent crude is at $93 per barrel.
Inflation number to be released next week is expected to rise to 7.3%, from 7.1% in January
On Thursday, the ECB announced it would pull back from QE faster than expected after their meeting on 2/3/22. ECB pivoted away from their policy of “lower rates for longer”. As a result, Italian yields are up dramatically. Yields of Italian bonds started the week at 1.2%… by Friday yields were over 1.7%. Negative yielding debt is at lowest level since 2018.
At a meeting in the UK, Bank of England Governor Bailey called on unions to hold off on demands for pay increases. Union officials called it “a sick joke”.
In equity markets Facebook (Meta) fell 25% and lost over $200billion in value overnight due to slower growth. The next day Amazon rose 15% and gained over $150billion in value on earnings and price hikes. These are massive flows of capital.
On Wednesday, ADP released numbers this week showed a decline of 301,000 jobs due to Omicron and a worsening in economic conditions due to rising bond yields. The question is how much of the drop is due to Omicron which is fading, and how much is due to a slowdown in the economy which could worsen as the Fed raises rates starting in March.
The White House warned “the January jobs number will be ugly”.
Priya Misra, TD Securities
“We think the jobs number will be distorted due to omicron. The fed has given us forward guidance so I don’t think the jobs number will affect fed decision making.” Says Misra.
“Higher 10 year real rates signal tightening financial conditions. There is a fear the Fed will over do it. If they can get market to believe the Fed is not behind the curve conditions should improve. We have less liquid markets; we need to buckle up.”
She continued, “You can tell the market is worried about growth because of the factors lined up against the consumer, including the price of oil.”
Misra expects a jobs number of -200,000… this would be the first negative print since the spring of 2020.
Jon Ferro comments, “Many people defend chair Powell, but to me, and many others, it seems like the Fed has let the party run far too long and the result is higher inflation. Chairman Powell has let this administration down. The fact that some blame the Biden administration for this inflation is wrong. We are still doing Quantitative Easing…”
Ellen Zentner, Morgan Stanley US economist
Zentner expects a print of -215,000 on the jobs number.
When asked about Fed hikes she explained, “I expect an ebbing of inflation in March; inflation will come off the peak. This doesn’t mean inflation is over… We are looking for the growth rate of price increases to slow. But inflation will stay high well into the middle of the year.”
Explaining the value of different parts of the Jobs Report, “We get a lot more information in the household survey. The payroll survey comes from businesses. We will probably have a stronger print for the household survey compared to the payroll survey.”
Medium estimate for payrolls is 125,000 and the unemployment rate is expected to stay under 4%. Jon Ferro injects, “this is a fully employed America”. Tom Keene says, “it’s the oddest of odd jobs reports”. Michael McKee calls it, “the most interesting and inconsequential report in years.”
At 8:30 the February Jobs Report was released…
Payrolls came in at 467,000, up dramatically… “monster upside surprise” says Jon Ferro. Employment rose despite Omicron.
The unemployment rate rose to 4% from 3.9% in January.
December Jobs Report was revised up from 109k to 510k.
Labor Force Participation rate stays at 61.9% (62.2% with revision).`
Average hourly earnings rose .7%, up 5.7% YOY. Estimate was for .5%. Pre-covid the annual average hourly earnings rate was about 3.9%
After dissecting the report Michael Mckee observes, “A lot (of the positive numbers) may be related to seasonal adjustments.”
Neill Dutta responding immediately to the report, “you cannot rule out a 50bp hike in rates in March”.
Jeffrey Rosenberg of BlackRock said “we are moving out of an era of negative real yields”
Rick Rieder of BlackRock fixed income
“Every piece of data in this report was good. This was an impressive report. It’s a bit mind blowing.
There is no ambiguity. This is now an era of tightening.”
What’s crazy Rieder asks? “We have 5 more weeks of QE… it makes no sense; they should just end it. The Fed has got to get moving. Markets are overshooting both ways. We have portfolios with 13-14% cash.”
Michael McKee commented, “I’m a little less excited than when I first saw the report… It is a statistical mess. Every January they update the revisions. The Fed will have to wait till next month to get a clearer picture.”
Mohamed El Arian, Queens College
Asked about the report, El-Arian shares, “It’s a huge surprise… it tells you the Fed has fallen farther behind the curve and the realization that the Fed is making a policy mistake (by not hiking rates sooner). There is a window for policy normalization, but that window is getting smaller and smaller.
If I were at the Fed, I would worry about what impact policy decisions will have on markets injecting volatility and threatening livelihoods.
That mistake is being made; the challenge is managing damage.”
Michael Collins of PGIM injects, “the issue for the Fed is inflation. But the challenge for the economy is going from QE, to raising rates, to QT in a period of 6 months… this will be a real challenge.”
Scott Minard of Guggenheim chimed in with the following… “the fed will be forced to tighten aggressively just as the economy slows from the lagged effects of stimulus runoff. Risk is increasing that just as the economy is slowing in real terms the Fed will be fighting inflation… There is no way out of stagflation at this point…”
As Priya Misra said… “Buckle up”
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- Bloomberg Surveillance 2/4/2022