Elon Musk likes Twitter… a lot

Stocks rose on Friday after monthly employment data showed a continued rise in hiring while the unemployment rate hit a new pandemic-era low.  The yield curve inverted on the employment data, but the omen did not prevent stocks from rising late in the session.

Sweat breaks upon the banker’s brow.  Come on, it’s no secret that most folks do not like central bankers. They have dry personalities and dream about…economics. They, more often than not, cause markets to become volatile despite their policy decisions. These days, they appear to be outright evil as they begin to lift rates, which have caused borrowing costs like mortgage rates and auto loans to jump higher. Evil, cruel, and malevolent, right? Hey now, where is your sense of compassion? Imagine how tough their jobs are right now.

So, we know that inflation is high, and that it is costing all of us more money. We also know that it is the Fed’s job to keep inflation at bay. For months and months, the company line at the Fed was “don’t worry about inflation, it’s transient.”  The Fed’s confident assurances, however, were not enough to keep actual inflation at bay, and prices to continue their climb. That puts the Fed in a tough spot, behind the eight ball, so to speak. 

Imagine how that makes the bankers feel?  Remember that every central banker’s dream is to have full employment and 2% inflation. During those dreamy hours, if things get sideways and unemployment rises, the Fed simply lowers rates just enough for unemployment to return to normal, the economy begins to expand, and inflation does not increase. Once accomplished, the Fed can simply move rates back to neutral. Another dream would include inflation picking up with a hot-running economy. The Fed would raise rates just enough, so as not to cause a recession, otherwise known as a soft landing in Fedspeak. 

Fed members also have nightmares, and they play like this. Unemployment is falling, which is good, but it is causing inflation to climb, which is not ideal. The problem could get even worse if there are supply shortages. The situation could get even more challenging if there is a geopolitical shock in commodity producing countries, causing raw material cost pressures to increase. In that nightmare, the Fed must turn to its most favored weapon, interest rate hikes. Hikes are not bad if they can be used to slow things down methodically, but in this nightmare, things are increasingly looking like a pump of the brakes may not be enough – no, this challenge may require a slamming of the brakes. Knowing that aggressive rate hikes might cause the economy to stall and go into a recession, the banker begins to toss and turn while sweat breaks upon the banker’s brow.  Bond traders seize upon the moment and cause the yield curve to invert. In the past 60 years a recession has followed a yield curve inversion in every occurrence except for one. Now the heat is on and the banker’s tossing and turning increases as bed sheets are pulled free. Then the banker suddenly sees a light remembering that if the economy stalls, the Fed can simply lower interest rates to get it back on track…ahh that should cause the dark clouds to break. But wait…in the dream, clouds begin to thicken further, and the banker’s field of view turns askew…as the banker realizes that RATES ARE ALREADY LOW, and cuts will have little effect on the situation. All in an instant, the banker is wrenched from sleep.  Taking a deep breath and in a puddle of sweat, the banker’s first calming thought is “thankfully that was just a dream,” when suddenly the banker realizes that this nightmare is…a reality.

Obviously, I took a bit of literary license to make my point. We are all aware that the Fed must raise rates to tackle inflation. But now, increasingly, it appears that the Fed must take aggressive action, which can cause the economy to go into a recession. In fact, a recession can occur on its own, caused by high inflation, low consumer sentiment, and increased geopolitical risk. With rates so low today, the Fed would have very little ammunition to fight a naturally occurring recession. That is why we hear Fed governors increasingly call for bigger and sooner rate hikes.  Bankers are hoping to get rates to neutral soon, so that the Fed has room to lower them if the economy stalls. Neutral is technical rate level which is neither accommodative nor restrictive.  There is much argument on what that level is, but many believe that it is a Fed Funds rate somewhere between 2% and 3%. The Fed Funds rate is currently at 0.25%, which is still accommodative and is considered to be a key ingredient for inflation. This is no dream.

WHAT’S SHAKIN’

Twitter Inc (TWTR) shares are higher by +25.18% after an SEC disclosure showed that Elon Musk took a nearly 10% position in the company. The stock is trading at $49.22 in the pre-market which is higher than the average analysts’ price target of $44.19. This might be interpreted as the stock being overpriced, but it does not mean that the stock will not continue to rise.

Starbucks Corp (SBUX) shares are lower by -2.48% in the pre-market after its founder and freshly re-minted CEO Howard Schultz announced that he is suspending all stock buybacks and will focus on employee retention. It is clear that wage pressure and the tight labor market is having an effect on the company.  Dividend yield: 2.14%.  Potential average analyst target upside:  +20.9%.

FRIDAY’S MARKETS

Stocks climbed late in Friday’s session for gains in the wake of strong employment numbers. The rise occurred despite the fact that the improving employment situation will give the Fed the go-ahead to raise rates more aggressively. The S&P500 gained +0.34%, the Dow Jones Industrial Average climbed by +0.40%, the Nasdaq Composite Index advanced by +0.29%, the Russell 2000 Index was higher by +1.01%, and the S&P500 ESG Index added +0.28%. Bonds slipped and 10-year Treasury Note yields gained +5 basis points to 2.38%. Cryptos advanced by +3.82% and Bitcoin gained +0.88%.

NXT UP

• Factory Orders (Feb) are expected to have slipped by -0.6% after climbing by +1.4% in January.
• Durable Goods Orders (Fed) may come in at -2.2% in line with prior estimates.
• On Wednesday, the Fed will release the minutes from its March 16^th meeting.  Investors will want to gain a better perspective of the Fed’s intent on the balance sheet. Please refer to the attached economic calendars for more details on releases and times.