Payroll Proves Pernicious to Powell Pivot
After beginning the year on a strong note equity and bond prices fell during February as strong economic data quashed hopes of a rapid Fed pivot. Ten-year U.S. Treasury yields leapt 42 basis points to 3.92% in February following a strong January payroll report of 517,000 additions, far above the highest economist estimate.
Additional robust economic reports during the month including the ISM Services index and CPI kept interest rates moving toward the important 4% level that traders doubted they’d see again so soon.
The prospect of sticky inflation and higher interest rates also pushed equities down nearly 2.7% in February as the prospect of a Fed pivot that drove the January rally was quashed.
Equities continue to bounce between the prospect of a stronger-than-expected economy and the risk of the Fed needing to push rates higher. So far 2023 economic readings and surveys had proven vigorous. But the Fed desires a slowdown to core PCE inflation and labor, which thus far is elusive.
While equities and bonds have fallen on stronger than expected economic news, there is reason to doubt the veracity of the economic figures. No doubt, the economy is stronger than the Fed wants, but the January payroll figures that induced the move in February were altered by the largest seasonal adjustment of the year, approximately 3 million jobs (BLS adjusts monthly statistics to account for seasonality—but introduces further errors by doing so). Ex this adjustment, the January figure would have been -2.5 million, not +517,000. The upcoming February figures may also prove strong as the weather has been unusually warm, but the seasonal adjustment figures are substantially lower. So, we may not get a “clean” look at the jobs situation for a while.
In the meantime, the key discounting mechanism for earnings—interest rates—continue to move higher. Earnings multiples remain high as well, and there is still risk to future earnings coming down, though this has been reduced by the recent economic strength. As always, we work to balance between the prospects for portfolio appreciation and the downside risks from the macro data.
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