When will the Fed Put return?

Stocks ended yesterday’s session lower, snapping the two-day rally that took stocks off their annual lows. ADP’s employment report came in stronger than expected, demonstrating just how tight the labor market is… still.

Be careful what you wish for. It is no secret that the stock market likes easy money. It would be hard to deny that the perpetually low interest rates that marked the period between The Great Recession and… um, last November had a big hand on an epic rally in stocks that saw the S&P500 rise some +548% from its 2009 lows through its late December ’21 zenith. That’s a big return, in case you were wondering. Sure, there were some dry spells and even some hiccups along the way, but the result cannot be denied, it was a momentous run. With regards to said hiccupping, those spells were ended by either looser fiscal policy or a reversal of tight monetary policy. I am not sure that we can classify this recent secular pullback in stocks as a hiccup, but it is clear that it is due in large part to the Federal Reserve’s resolute, hawkish monetary policy. We would, of course, all of us, prefer the market to rise higher, and if the reversal of the recent bearish pattern would take a Fed policy pivot… well, naturally some may hope for bad economic news to help things along.

This attitude is not novel in 2022, the “bad is good” moniker was one that was frequently used throughout the post Great Recession period. Just enough bad news for the Fed to keep its so called “Fed put” open. Remember the Fed put? Investors could almost count on the Fed saying or doing something dovish the moment stocks seemed like they were on the brink of collapse. Well, clearly that option is long expired, and the Fed is hell-bent on getting the message out there. So, let’s see, what sort of bad news would be enough for the Fed to pivot and re-issue its put? Well, a recession for starters. It would be hard to imagine a Fed raising interest rates while the US is in a recession. On that, the US has experienced two consecutive quarters of negative GDP growth. While some consider that a technical recession, it is, in reality, just a pre-condition for the National Bureau of Economic Research (NBER) to take a closer look at a number of indicators to make the official call. In addition to GDP growth, NBER looks at things like Industrial Production, Durable Goods Orders, the housing market, Personal Income & Spending, and employment, to make the final call, which can occur well after an official recession has begun. So, if you want a recession… because you want a Fed pivot, then you would want to see those indicators, along with others, to disappoint with some regularity. One of those, employment, is something that the Fed itself is very interested in - it also happens to represent ½ of its dual mandate. The Fed has said quite clearly that it would like to see unemployment increase as an indicator of weaker expected demand and inflation. Indeed, while some of the NBER conditions above have begun to show some signs of cracking, higher unemployment seems to be evasive. Weekly employment numbers have recently been trending positively. However, earlier this week, the JOLTS Job Openings number, an indicator that was rarely quoted until recently, showed that there were some -1 million less job openings from a month earlier. That is consistent with what we were hearing from corporate CEOs. In recent months, more and more companies have begun to announce hiring freezes. A hiring freeze is negative, but not quite as biting as job cuts. Cuts would surely increase the Unemployment Rate and satisfy the NBER, if not the Fed itself, that some sort of pivot may be appropriate. Tomorrow, we will see how strong… or weak the labor market is with the monthly employment situation report.  

What might we expect? Well, economists are expecting unemployment to remain at a strong 3.7%. Beyond that, we would have to know what corporate CEOs are planning to do in the months ahead. Hold on, perhaps a survey of what CEOs are expecting might shed some light on that. Big 4 accounting firm KPMG released a report earlier this week on just that. That report relayed that some 91% of CEOs were expecting a recession within the next 12 months. Whether that happens, officially or not, is immaterial. What is material is what CEOs typically do when a recession is expected… they cut jobs, because it is easy to do, it looks prudent to investors, and it increases earnings. KPMG was sure to ask that question as well, and slightly more than 50% of them were considering job cuts within the next half-year. Does that classify as bad news is good news? Wouldn’t it just be better for all of us all to just wish for inflation to come down?

YESTERDAY’S MARKETS

Stocks declined yesterday after OPEC+ announced production cuts which has the potential to hamper a decline in inflation. The S&P500 lost -0.20%, the Dow Jones Industrial Average declined by -0.14%, the Nasdaq Composite traded lower by -0.25%, and the Russell 2000 Index dropped by -0.74%. Bonds declined and 10-year Treasury Note yields added +11 basis points to 3.75%. Cryptos slipped by -0.27% and Bitcoin pulled back by -1.73%.

NEXT UP

• Initial Jobless Claims (October 1) is expected to come in at 204k, higher than last week’s 193k claims.
• Today’s Fed talking parade includes: Mester, Kashkari, Evans, Cook, and Waller.