July 10, 2023

Is your pay going up? If so, the Fed is unhappy about it.

Stocks traded lower on Friday giving up early-session gains in response to a cooler-than-expected employment number. Markets are now factoring in a single +25 basis-point rate hike later this month despite signs of labor market cooling and inflation dialing back.

In labor. Is the Fed obsessed? It sure is, because that is its job, however lately it has adopted a “go big or go home” attitude which has done a good job messing with traders’ collective digestive health. For my non-US readers, “go big or go home” is an idiomatic expression which implies that something is being done to an extreme. In this case I used it to imply that the US Central Bank appears to be all-in with its monetary tightening, not letting up an inch. The impression given to investors and consumers is “slow down!” It is true that there are signs that the more-tangible interest rate hikes along with its “angry Fed-speak” is having an effect as the most recent inflation figures show a continued slowdown. It seems pretty likely that inflation peaked last summer and is in the midst of sorting itself out. Further it is likely that many of the Fed’s tightening efforts will take time to propagate through the economy and will ultimately have the desired effect. Still, the Fed’s battle rages on and the market, according to overnight swaps and futures, is expecting another +25 basis-point bump later this month or in September and a 37% chance of another hike in November.

The Fed’s latest battle is with the labor market. FOMC members have been quite vocal about the need for the labor market to slacken. The unemployment rate remains around a historic low and there are still 9.8 million job openings available, that is around 1.6 for every person unemployed. Those are two classic signs that the labor market is tight. With so few people seeking many jobs, the theory is that employers will be forced to pay up to get workers on the job. Paying higher wages means increased costs for companies, and you know who ultimately ends up paying for those increases – the consumers. That’s right, inflation. More inflation. That is why the Fed, in its words, or its leader’s words, would like to see something more like 1 job for every unemployed person. To get there we would have to either have less job openings or more people unemployed … BECAUSE MATH. With job openings remaining just below all-time highs for some time, the Fed has been focusing on unemployment, sadly wishing it to increase. Friday’s monthly employment series showed that the Unemployment Rate pulled back last month to 3.6%, which was expected, but still going in the wrong direction – from the Fed’s perspective. Friday’ series also showed that there were only 209k new Nonfarm Payrolls added last month. I say “only” because investors were fearful that the number could be much higher in the wake of Thursday’s ADP Employment Change number which came out with a blowout, high number. So, the fact that the “official” Government number for the Bureau of Labor Statistics came in at a slightly cool, below expectations level, is a start in the right direction for the Fed hawks. For some clarity, most of last month’s new jobs came from the Government and the so-called low-skilled services categories. The services sector was hardest hit during the pandemic and its continued recovery continues to vex the Fed. Another number from Friday’s data series was Average Hourly Earnings, which grew by +4.4% since last year. Economists were expecting a lower number and last month’s number was revised up. Though it is not a popular metric to watch, I reminded you on Friday that the Fed would be looking at this as it is the real reason why policy makers are watching the labor market – wage inflation. And that one, my friends, went in the wrong direction and is likely why the markets faded late in the session, giving up earlier gains. Later this week on Wednesday and Thursday we will get some more inflation data for the markets to digest and Friday will mark the start of earnings season. Yes, Friday, a steamy Friday in Wall Street’s summer, which means no rest for you. Stay tuned, stay cool, stay dry, and most importantly, stay focused.

STOCKS ON THE MOVE THIS MORNING

Advanced Auto Parts Inc (AAP) shares are lower by -2.62% after the company was downgraded to UNDERWEIGHT by Atlantic Equities. The firm’s analyst believes that internal troubles and an expected announcement of structural changes will have a negative impact on the company’s earnings growth. The company will announce its earnings in late August. Dividend yield: 1.44%. Potential average analyst target upside: +10.3%.

The Charles Schwab Corp (SCHW) shares are higher by +1.25% in the premarket after receiving an upgrade to MARKET OUTPERFORM and a price target hike from JMP Securities. In the past month 33% of analysts have modified their price targets 5 up, 2 down, and 14 unchanged. Dividend yield: 1.76%. Potential average analyst target upside: +18.0%.

FRIDAY’S MARKETS

Stocks slipped on Friday after late-session selling erased earlier gains in the wake of a mixed unemployment number. The S&P500 fell by -0.29%, the Dow Jones Industrial Average traded lower by -0.55%, the Nasdaq Composite Index slipped by -0.13%, and the Russell 2000 Index gained +1.22%. Bonds declined and 10-year Treasury Note yields added +3 basis points to 4.06%. Cryptos lost -0.40% and Bitcoin slipped by -0.14%. The S&P ESG Index fell by -0.29%.

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