The Fed Juggles Jobs and Inflation | Morning Express | 1/5/2023
Posted: Jan. 4, 2023, 10:44 a.m.
Fundamentals: The resiliency of U.S. equity benchmarks this week is undeniable, buyers have shown up in the final hour of each session. Maybe this exudes underlying strength, or maybe it is simply a textbook consolidation ahead of December’s Nonfarm Payrolls report tomorrow. Yesterday, the Federal Reserve released the Minutes from their December meeting. There were no surprises, essentially including a thoughtful emphasis on ‘more work to do’. Post-Minutes, the S&P incurred a range of 1% but remained buoyant through the closing bell.
The week’s economic calendar began heating up yesterday, and the results were a perfect example of the current environment. On the one hand, Manufacturing PMI for December contracted right at expectations, and Manufacturing Prices contracted for the third month in a row, the fastest pace since the onset of the pandemic. On the other hand, JOLTs Job Openings came in nearly half a million above expectations, while October’s was revised higher. The two combined for 636,000 more job openings than expected. Today, the first glimpse at December jobs through the private ADP survey showed much stronger growth than expected at 235k versus 150k expected. Shortly after, weekly Initial Jobless Claims came in at 204k versus 225k, the lowest level since September 29th. Although inflation is clearly coming down, the labor market remains extremely tight, and this is not what the Fed wants to see. However, at what point will the Fed acknowledge the true distortions within the labor market? The Federal Reserve’s most recent and most notable mistake came in 2021. The economy was clearly heating up, but they refused to remove support because the Unemployment Rate was too high, and people were out of work. We now have the complete opposite, yet the Fed is not lifting its foot from the tightening pedal.
We believe a pause in rate hikes is completely plausible. Mainly because the Fed must allow their ‘cumulative’ tightening to work through the system, but now also because they must acknowledge the distortions within the labor market and the parallel to their historical mistake in 2021.
Fed speak is back in full force today with Kansas City Fed President George at 7:30 am CT, Atlanta Fed President Bostic at 8:20 am CT, and St. Louis Fed President Bullard at 12:20 pm CT. However, both George and Bullard are no longer voting members.
E-mini S&P (March) / NQ (March)
S&P, yesterday’s close: Settled at 3874.50, up 28.50
NQ, yesterday’s close: Settled at 10,999.25, up 53.75
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NQ (March)
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Crude Oil (February)
Yesterday’s close: Settled at 76.93, down 3.33
Fundamentals: Crude Oil is down more than 2% on the session with broad recession fears remaining the blatant headwind. Despite supportive comments from Chinese officials on the economy, a surge in virus cases dents the near-term demand outlook. Furthermore, China lifted its Coal import ban. Coal competes with petroleum and Natural Gas for power generation. Data this morning showed OPEC+ was less over-compliant in December than November at 161% versus 163%. Quota-bound members missed their output goal by 780,000 bpd versus 800,000 bpd in November. However, due to a rebound in Nigerian production, not quota-bound, OPEC+ production rose by 120,000 bpd from November.
Early expectations for tomorrow’s inventory report (and the private API survey after today’s bell) are for +2.27 mb Crude, -1.5 mb Gasoline, and -1.833 mb Distillates.
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Gold (February) / Silver (March)
Gold, yesterday’s close: Settled at 1846.1, up 19.9
Silver, yesterday's close: Settled at 24.236, 0.196
Fundamentals: Gold and Silver continue to find bullish tailwinds, underpinned by strength across the Treasury complex and seasonality. Yesterday’s spike in the U.S. Dollar is all but erased, helping to elevate Gold to the highest since June 27, 2022. We also want to keep a close eye on the Gold miners to confirm this breakout, discussed in the Technical section below. As we noted above, in the S&P/NQ section, the week is just getting underway, and it is a busy one ahead. ISM Manufacturing is due at 9:00 am CT, and the December FOMC Minutes at 1:00 pm CT. Tomorrow, we get a glimpse at jobs with the private ADP survey and weekly Initial Jobless Claims. Friday brings Nonfarm Payrolls for December, followed by ISM Non-Manufacturing.
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Silver (March)
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