Switzer on Saturday

Jobs and wages surge but surprisingly stocks rise

Founder and Publisher of the Switzer Report
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While the news doesn’t seem to add up, I’m happy to accept Wall Street’s take on a stronger-than-expected jobs report that brought higher-than-tipped wages growth, but all up it wasn’t seen as a bad statistical take for stocks. I’m not sure how that works but I’m happy with all three market indexes up robustly despite the news.

Why is this all a little crazy? Sure, a strong labour market KOs any talk about 12 rate rises in the US creating a recession, which wouldn’t be good for stock prices. However, on the other hand, since early 2022 we’d learnt a new market mantra that if the job creation and wages growth was too high, expect stubbornly high inflation and more rate rises, which smashes growth and tech stocks in particular.

But in February 2024, the Nasdaq is up over 1%. So, what explains this new reaction to a stronger-than-forecasted jobs report? This from Stephen Stanley, chief U.S. economist at Santander bank, helps a bit of the understanding for why the market has risen on 335,000 new jobs in January compared to the 185,000 predicted by economists: “The incremental fall in the unemployment rate and the jump in average hourly earnings fills out a consistent picture of a still robust labor market.”

Stanley then looks at the implications for rate cuts and concludes: “Will this finally cool the market sentiment toward early rate cuts? I still think the Fed is on hold until November.”

So, if he is in tune with the new Wall Street view on when rate cuts will come, it still is a little surprising that stock prices, which rose on the belief that rate cuts were close, could still be positive when some are tipping the Yanks might have to wait 10 more months for the first cut.

Of course, the first cut could come earlier, and Stanley could be too stoic about imminent cuts, but the clue as to why the market has a new mantra about how to interpret a strong labour market was partly explained by the Fed boss’s comments this week, when Jerome Powell didn’t raise rates but shot down the once-expected March rate cut.

This explains a lot: “The Federal Reserve isn’t concerned that the economy is too strong right now,” Powell told CNBC’s Jeff Cox. “We’ve had inflation come down without a slow economy and without important increases in unemployment. There’s no reason why we should want to get in the way of that process if it is going to continue”.

And he added: “Continued declines in inflation are really the main thing we are looking at. Of course, we want the labor market to remain strong too. We don’t have a growth mandate. We have a maximum employment mandate and a price stability mandate.”

Powell’s getting what he probably prayed for and as a central banker he’d now want to gradually ease rates down to create the soft landing that all people with jobs like him would aspire to achieve.

It’s good news and as a market optimist for 2024 I’ll take it, but there is other good news for people like Powell and me and that’s the productivity news out of this jobs report for January.

TradeStation’s global head of market strategy David Russell noted that the strong jobs report, which can also indicate inflation, will remain in check as productivity remained robust, which is the holy grail for an economy and stock price growth, as it implies lower production costs and higher profits.

“Longer term, stocks could be in a strong spot with accelerating economic growth supporting consumption and earnings,” Russell said. He is right and does a lot to explain why Wall Street is on the rise and Powell is positive.

What could upset this lovely apple cart? Inflation readings? But even here, we saw seven days ago that the Fed’s favourite price rise gauge — the PCE or the personal consumption expenditures price index for December, increased by a small 0.2% on the month and was up 2.9% on a yearly basis, excluding food and energy. And this was lower than expected. But more importantly, the 12-month rate is the lowest since March 2021, before inflation took off in a post Covid-lockdown world.

Including volatile food and energy costs, headline inflation also rose 0.2% for the month and held steady at 2.6% annually. The Fed had to be happy about that, and if this inflation dropping news is sustained, then 2024 will be great for stocks.

“Inflation dynamics inside the metric that the Fed uses to formulate policy strongly imply that the central bank will hit its inflation target in the near term,” said Joseph Brusuelas, chief economist at RSM. “This will create the conditions in which it makes [its] policy pivot and begins a multiyear campaign in which it reduces the policy rate towards a range between 2.5% and 3%.”

This all adds up to explain why we should see a good day for stocks on Monday and beyond, but we will remain in data-watching mode, looking for signs that this stronger-than-expected growth doesn’t become inflationary. This also puts a lot of pressure on US companies to keep delivering productivity gains and underlines the role on innovations such as AI.

A lot of this was mirrored in the surging stock price of Meta this week. This is how The Guardian reported the news: “Overall, Meta reported fourth-quarter revenue of $40.1bn, beating the predicted $39.18bn and up 25% year-over-year. The report comes as Meta, like many of its big tech peers, is seeking to integrate artificial intelligence tools into its core products. In a statement accompanying the report, Zuckerberg said Meta has ‘made a lot of progress on our vision for advancing AI and the metaverse’.”

To the local story and a bank rebound helped our market end a great week for stocks, with the S&P/ASX 20o index up 144 points (or 1.91%) to finish at 7600.

David Bassanese, chief economist at BetaShares, is right when he told the AFR that “investors are optimistic over a soft landing in the US, in a way our market is playing a little bit of catch-up to the months of gains in the US.”

He then added: “The macro backdrop in Australia is also good. We’re getting a soft landing as post the December quarter inflation [print], the bond market is more confidently pricing in rate cuts this year.”

Helping our market is a gradual positivity about real estate plays as rate cuts seem likely this year and maybe sooner than later. The AFR on Friday told us that “the local real estate sector rebounded 3.3 per cent, led by Goodman Group, which jumped 6.2 per cent to $26.98.”

Meanwhile, the AFR’s Tom Richardson and Joanne Tran pointed out the following on mining: “The materials sector also rallied, and ASX heavyweight BHP Group was up 1.1 per cent to $47.61. Gold miners were also among the best performers as Northern Star Resources rose 4.1 per cent to $13.92 and Newmont increased 2.7 per cent to $54.84.”

And given my story on Monday, I was happy to see Pilbara Minerals up 2.01% for the week and Liontown up 6.56%. Let’s hope it’s the start of an upswing, though I think it could be too early.

What I liked

  1. Australian inflation is falling faster than the RBA expected.Inflation fell to 4.1% year-on-year in the December quarter, which is well below the RBA’s forecast for 4.5%, and down from 5.4% in the September quarter and a peak of 7.8% a year ago.
  2. AMP’s Shane Oliver said: “By year end, we expect the RBA to have cut rates three times taking the cash rate to 3.6%.”
  3. Retail trade fell by a large 2.7% in December and is just 0.8% higher over the year, which is bad news for retailers but shows the RBA that they have done enough rate rises.
  4. The value of new housing lending fell by 4.1% in December but remains 11.7% higher through the year.
  5. The US job report with 353,000 new jobs created and unemployment held steady at 3.7% against forecasts of a rise to 3.8% and the market’s positive reaction!
  6. The Fed got it right, hosing down rate cuts too soon.
  7. Nearly 50% of US S&P 500 companies have now reported December quarter earnings,with 79% coming in better than expected, which is above the norm of 76%. So far earnings growth for the quarter is running around +6.2% year-on-year.
  8. Eurozone inflation fell to 2.8% in January, with core inflation falling to 3.3% year-on-year, with the comments by the European Central Bank (ECB) officials being a bit more dovish. The ECB is likely to start cutting in April.

What I didn’t like

  1. Not much but there was a little concern with a small US bank and a Japanese bank, as explained here by Shane Oliver: Losses tied to US commercial property are continuing to cause problems in an echo of the regional bank problems seen in the US last March, with New York Community Bancorp sharply boosting its loan loss reserves and Japan’s Aozora Bank announcing large losses on US commercial property. These problems could well be limited – with the New York Community bank reflecting losses on Signature Bank assets it acquired – and lower interest rates and bond yields should start to relieve some of the pressure on commercial real estate.

Why you shouldn’t see Evergrande’a collapse like Lehman Brothers

I liked this from Shane Oliver on the collapse of Chinese property giant Evergrande: While news of a Hong Kong court ordering the liquidation of troubled giant Chinese property developer Evergrande at the request of its offshore debt holders caused much excitement outside of China, it’s not a Lehman moment that will turn China’s property downturn into a global crisis. First, it isn’t a big surprise, as Evergrande’s problems are well known. Second, it’s doubtful that Chinese courts will allow liquidators to sell Evergrande assets in China in a fire sale, given the Chinese Government’s focus on protecting home buyers and completing more homes. Finally, the Chinese Government will continue to seek to offset any impact from the property downturn and Evergrande’s woes on the economy with property and economy-wide stimulus measures.

 

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