[This last week and heading into this week has been so chock full of macroeconomic news and takeaways in the commodities that I’ve decided to break this Part 8 into two sections (A) Macro Market Movers and (B) Commodities. Stay tuned, because I’ll post the second part on the resource sector in the next day or so]
The last week of January was a very busy one for investors, with a flurry of macroeconomic data points popping up and then popping back down like a large game of financial whack-a-mole. The next big data point quickly became passe and stale-dated a day or so later, to then shine a light on the next shiny data point. All-in-all, it was really hard for investors and the financial media to know exactly what to really focus on and what actually mattered.
We had all kinds of earnings reports coming in from the mega-cap tech companies and consumer staple companies, then the mid-week FOMC Minutes with one narrative, but then the Powell press conference with different market takeaways, then the jobs report headline number being a huge beat on the surface, and all of this being paired with the constantly changing Fed fund futures speculations about rate cuts. This added up to a whole lot of volatility, and traders trying to place quick trades on one financial narrative before it ducked out of view and was replaced by a new data point popping its head up.
- The main point for investors and economists even digesting all this financial news and data flow is to ascertain the health of the US economy and most importantly, what the central bank may do with their monetary policy as a result.
The end game on each new data point that gets paraded out to the financial media is to play 4-D chess and try and calculate when and by how much the Fed will start cutting rates. This economic war-gaming is simply wild speculation, and so far it’s been a fool’s errand. Since back in mid 2022, we’ve seen Fed fund futures as a constantly moving target for almost 2 years now, and projections have been all over the map, but consistently too optimistic that rate cuts were right around the corner. We heard from many about past historical evidence, that the Fed will typically cut 60-90 days after pausing rate hikes, but so far we are well past that time period and still not a rate cut on the table for the next few months. Maybe this time is different… (don’t you just hate that phrase?)
The point is that no news seems to have much sticking power these days as we roll from month to month and quarter to quarter, and the goal posts for first cuts have consistently moved from early 2023, to now all the way back to mid to late 2024. People that have tried to trade interest rate sensitive markets based on reading the tea leaves on the macroeconomic news conversion into central bank monetary policy have been consistently wrong-footed.
To a degree, most of the macro news from last week has, once again, already been superseded by a widely watched and panned “60 Minutes” interview with Federal Reserve Chair Jerome Powell that aired on Sunday night.
In this interview, Powell rehashed the blowout January jobs, people’s concerns about the commercial real estate sector, the potential collateral damage to the regional banking sector, the prospects of when the rate cuts would start, clarifying comments on the Fed’s 2% inflation target, and concerns about a growing US fiscal deficit.
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It was a slightly confusing interview considering how the stances on many charged topics have transmogrified from the mouth of the Fed head, (as is par for the course in revisionary Fedspeak). Many of the talking points Powell made stood in stark contrast to statements issued by a whole host of fed officials for the last few months of 2023. One area many market observers noted that was especially concerning was the admission of the challenges in commercial real estate and the prospects of more smaller regional bank failures. (Remember when we were assured had seen a line in the sand drawn after Silicon Valley Bank and those concerns were now in the rear-view mirror? Oh really?….)
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From the 60 minutes interview transcript:
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>Scott Pelley: The value of commercial office all across the country is dropping as people work from home. Those buildings support the balance sheets of banks all across the country. What is the likelihood of another real estate-led banking crisis?
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»Jerome Powell: I don’t think… I don’t think that’s likely. We’ve looked at the larger banks’ balance sheets, and it appears to be a manageable problem. There’re some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we’re working with them.
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>Scott Pelley: You believe it’s a manageable problem? (Powell: I think it appears to be) We’re not gonna see bank failures across the country as we did in 2008?
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»Jerome Powell: I don’t think there’s much risk of a repeat of 2008. Certainly, there will be some banks that have to be closed or merged out of existence because of this. That’ll be smaller banks, I suspect, for the most part. You know, these are losses. It’s a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable.
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>Scott Pelley: You seem confident in the banks, and yet the Silicon Valley Bank, second largest failure in U.S. history. Did the Fed miss that?
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>Jerome Powell: So, yes, we did. and we forthrightly– saw that we needed to do better.
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So the question for any rationale person should be – Are they going to do better?
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If the Fed was surprised that inflation wasn’t transitory, surprised they’d have to wrap up their tapering months faster than anticipated, surprised they’d have to hike faster and more aggressively a whole year earlier than anticipated, and they were surprised by the regional bank crisis last spring in 2023 where there were 2 of the largest bank failures in history… Then what really gives anyone any confidence that the Fed has any grip on the severity of the potential problems facing the regional banking sector here and now?
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Ø If bonds keep selling off, and rates keep popping higher again, then what does that do to the bond assets that regional banks are holding onto? That was the whole problem a year ago, and it doesn’t seem those mid-sized to smaller banks are out of the woods yet.
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Ø With the Fed’s emergency overnight repo Bank Term Funding Program (BTFP) set to wind down in March, then what will these smaller to mid-size banks do to shore up losses held on their books that will eventually be daylighted? Those trillions of dollars in liquidity back-stopping the banks has been the only thing holding back more carnage since the banking crisis last spring. It will be interesting to see how long many of these smaller banks can keep peddling their bikes, without the Fed training wheels supporting them and keeping them upright.
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To illustrate this very point we just witnessed more timely news: New York Community Bancorp (NYCB) is a $116 billion commercial real estate lender that, once again, blindsided the Fed and Wall Street last week by slashing it’s dividend due to a “surprise” quarterly loss, and importantly millions of dollars in future losses on it’s books. Again, this is primarily related to it’s commercial real estate holdings. People have been scoffed at by financial media talking heads and Fed sycophants for pointing to this potential commercial bank issue most of last year. It is more than clear that there are still a number of skeletons in the closet for a lot of regional banks. What will be the next shoe to drop?
Look, (NYCB) fell by 38% on Wednesday, then another 11% on Thursday, dragging the rest of the regional banking sector down with it (as evidenced by the KRE EFT). It recovered a small amount in Friday’s trading session, but then New York Community Bancorp closed down another 10.76% today on Monday. At this point it has essentially had it’s valuation chopped in half in less than a week. That’s not a good look, and the question remains, how many more banks may go through something similar?
One can see how the SPDR S&P Regional Banking ETF (KRE) was hit hard by this last week, and flies in the face of the many generalist that have been very constructive on the financial sector for this year in 2024. Sure, there was a solid recovery off the October lows of 2023, rallying in sympathy with most other markets and spiked by the December Powell “Pivot Party.” However, looking at the recent chart damage, on fairly high trading volume, the pricing is now decisively down below the 21-day and 50-day exponential moving averages (EMA), and testing the 200-day EMA. So far that has held as support, but if that breaks then Katie bar the door for the regional banks…
OK, so there’s this commercial real estate / regional banking concern that was aired out in the 60 minute interview with Jerome Powel. When those revelations are paired with his comments about not having a March rate cut as a “base case,” then the markets pulled back to kick off this week. There may have also been profit-taking after a pretty solid rally into the end of last week, on the continued pattern of better-than-expected job numbers. However, there was a silver lining to Powell’s comments in yesterday’s interview, in that he has now conceded publicly that they are not planning on waiting for inflation to get down to 2% and stay there for reasonable amount of time. That’s different than Fed messaging for almost a year now.
Even at last week’s press conference after the FOMC meeting, the Fed messaging mid-week was still that in relation to taming inflation and switching back to monetary loosening and rate cuts; that there was a “danger of moving too soon is the job’s not quite done.” Powell had gone on to say mid-week that “We’re not declaring victory at all. I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting. It’s a highly consequential decision to start the process of dialing back on restriction and we want to get that right.”
Then on Sunday evening’s 60 Minutes interview, Powell seemed to have shifted the narrative once again.
Scott Pelley: Are you committed to getting all the way to 2.0% [inflation] before you cut the rates?
Jerome Powell: No, no. That’s not what we say at all, no. We’re committed to returning inflation to 2% over time. I’ve said that we wouldn’t wait to get to 2% to cut rates.
(So now you central bankers are not going to wait until inflation gets to 2%. Oh really…?)
You would think this would have been good news to the markets, because they are now signaling that they are going to move on cutting rates prior to seeing a consistent 2% inflation reading, but it appears the comments brushing aside a March rate hike, and making the May FOMC more dubious, were just too much for both the equity markets and bond markets as they digested all of this at the main takeaway to kick off this week. According the CME Fedwatch tool, the odds of a March 20th FOMC rate cut are now down to 16%, after this was all but a certainty just in December of last year.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
As a result the market sold off bonds and we saw another pop higher in interest rates, with the 10-year bond yield popping back over 4% to 4.16% (today) on Monday. As evidence on the TNX CBOE 10-year US Treasury Yield index, the 41.6 level shot right back up above the 200-day and 50-day EMAs. Higher rates thus further pressured US stocks and gold to kick off this week.
As has been noted here a few times now, we are in a strange place where even after the recent pop in bond yields they are still quite a bit below the Fed funds rate of 5.25-5.5%, and more importantly that rate is markedly higher than where inflation readings are coming in (closer to 3% year-over-year, and 2% on a 3-6 month rolling average). That means that “real” inflation-adjusted interest rates are still in the positive, and this generally doesn’t persist too long before shifting to a monetary loosening policy. When those rate cuts do finally get initiated later this year, it is quite possible that is what marks a top to the rally in the general US stock markets, and starts the next bull market rally in interest rate sensitive sectors like gold.
Before we move on from the macro into more individual sectors, we should also address the BLS jobs report from last Friday, from a headline standpoint, and then dive under the hood at just how insane these adjustments and revisions are becoming.
On the surface, January’s jobs number of 353,000 blew away almost all economists’ expectations. Additionally, wages jumped up by 4.5%, and unemployment remained low at 3.7%. It was a glowing report, and as a result, financial outlets immediately heaped on the praise for the robust labor markets, and gushed that the jobs market was so resilient that it was accelerating despite the “higher for longer” interest rate environment.
- Last Friday, over at the KE Report, we had a solid interview with Marc Chandler, Managing Partner at Bannockburn Global ForEx and Editor of the Marc To Market website, where he recapped the strong BLS jobs data released, and weighed in on the Fed meeting and press conference from a main-stream generalist perspective. He did a good job of encapsulated what factors and key data that the equities, bonds, and currencies markets were trading off of to close up last week.
However, if one actually looks at how these jobs numbers are calculated (or one could say engineered) it can really make one’s head hurt. The reality is that most people don’t want to look at how the sausage is made. All the adjustments and how part-time vs full-time jobs are calculated and conveniently ignoring that there are actually more people giving up on looking for jobs and less people looking are not being counted does make this whole exercise a bit of a farce.
- My buddy, Craig Hemke, that runs TF Metals report, has often quipped that they should be called the BLS (BS) jobs report, for these very reasons. He really gets fired up about how these jobs reports are calculated in an interview we had with him on the KE Report last Thursday, and I’ve put in a hot link here that should jump listeners to that section of the interview at the 10 minute : 16 second mark.
Craig Hemke – Fedspectations Shift Post Powell Presser – All Eyes On The Jobs Number
There have been a lot of pundits that have pointed out how many of these economic reports that are pushed out to the markets from inflation, manufacturing, to GDP, consumer confidence, and yes the jobs numbers are massaged. However, this weekend there was a very eye-opening article published on Saturday titled:
“Inside The Most Ridiculous Jobs Report In Recent History.”
https://www.zerohedge.com/economics/inside-most-ridiculous-jobs-report-recent-history
This deep dive into the jobs data really shreds the prevailing main-stream narrative about how strong the labor market is… or possibly isn’t by simply analyzing the data inside the report. I don’t have time here to get into some of the nuances around how unemployment is calculated and reported, or how payroll numbers get tweaked and massaged, but I will post one of the more telling passages, from that article linked above, that really caught my attention with regards to just the number of jobs created and reported as the headline number.
“Which would be great, if only it wasn’t almost entirely due to the BLS’s latest choice of seasonal adjustments, which have gone from merely laughable to full clown-show, as the following comparison between the revised BLS Payrolls number and the ADP payrolls show: the trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is actually far more accurate), shows an accelerating slowdown.
“And speaking of seasonal adjustments, the January print was all seasonals, because while the seasonally adjusted payrolls was up 353K, the unadjusted was down 2.635 million, a 3 million jobs delta. In other words, just a 10% error rate in the seasonal adjustment (roughly where it falls) would wipe out the entire gain and make January increase a decline. Then again, this is the case with every January jobs report, because as shown below, the actual change in jobs in the first month of the year is down anywhere between 2.5 million and 3 million!”
For most people, living in the real world, I think we all know of family, friends, and colleagues that have lost their jobs over the last year, and we’ve all seen the string of large corporations laying off significant amounts of workers in the headlines.
Remember near the holidays where the toy company Hasbro laid of 1,100 employees in December, after already having made 800 other layoffs earlier last year prior to that announcement. Or how about UPS laying off 12,000 workers announced just last Wednesday on January 31st, or Microsoft announcing last month that it was laying off 1,900 workers. Here are just a few of the announcements we’ve seen in the last week:
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February 1, 2024 – Deutsche Bank to layoff 3,500 jobs and reward shareholders.
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January 31, 2024 – UPS will cut 12,000 jobs as part of a bid to save US$1 billion in costs.
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January 30, 2024 – American Airlines to lay off 656 workers as it consolidates customer support.
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January 29, 2024 – iRobot, vacuum maker to lay off 350 employees.
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January 27, 2024 – Levi Strauss will lay off 10%-15% of corporate workers.
Here is a great resource for tracking the downsizing and rightsizing in corporate America.
- Companies That Announced Major Layoffs and Hiring Freezes
- February 1st, 2024 – Intellizence
https://intellizence.com/insights/layoff-downsizing/major-companies-that-announced-mass-layoffs/
Bottom line on the health of the labor markets: It is hard to square all these layoffs and the actual unadjusted job loss of 2.635 million jobs, versus the headline seasonally adjusted jobs number being up as a 353,000 jobs gain. That is a huge gulf between unadjusted job losses and adjusted job gains, and there is definitely some gamesmanship going on with how these numbers are being adjusted and reported. Regardless, few market participants or even “professional” financial news outlets are interested in that again, as it would interfere with the prevailing soft landing narrative.
- We had a poignant interview today with John Rubino, with regards to some of the macroeconomic data points and jobs report news where he dives into some of these same themes, and encourages investors to dig further into these reports and question the prevailing narratives bandied about in the mainstream financial markets media.
John Rubino – The Issue Of Rising Interest Rates, The Truth Behind The Strong Jobs Data
US Dollar:
Compared to other currencies, the US dollar has really been garnering the bid lately, as “the cleanest shirt in the dirty laundry bin.” This American exceptionalism makes sense because compared to Europe, Great Brittain, Japan, or China, the US economy is on more sound footing, and the greenback remains the world’s reserve currency.
It is surprising to see the buck truck higher, consistently breaking a number of shorter-term technical resistance levels, when so many came into 2024 bearish on the US dollar. A range of technical analysts agreed that the congestion zones at 102.50 and then again at 103.50 would act as strong resistance to deflect the greenback back lower again. There were even sharp analysts pointing to the psychological 104 area or the recent peak at 104.26 as technical level of resistance that would be challenging for the dollar to get through and lines in the sand. Well, on the back of all this positive US macroeconomic news, negative global growth news, and a push higher in interest rates, we saw the USD cash settle price close up to 104.45 here on Monday’s trading session to kick of this week. It is clearly above all those prior resistance levels, and just put in the highest close since November, closing decisively above both its 50-day and 200-day EMAs.
US Equity Markets:
Despite the economic machinations seen in the bond markets, currency markets, and fed fund futures markets pushing back rate cuts, none of this seemed to matter to the US equity indexes towards the end of last week. US stock indexes surged up near all-time highs again on Friday. I read several financial editorials remarking that the narrative had shifted from bad news is good news, to the good news is now good news. Convenient eh? Apparently, Powell isn’t the only one that has pivoted then.
It should be noted though, that other than the brief Pivot Party hangover the very end of December through the first 2 weeks of January, that the larger general equities have just been plowing higher and higher for the last few months. The 3 main stock indexes, the Dow, Nasdaq, and S&P 500 have all vaulted to new all time highs in the last 2 months, and so for investors positioned in the weighted index funds, this has been one hell of a ride.
Dow Jones Industrial Average INDU chart to all-time highs:
Nasdaq Triple Q’s chart to all-time highs:
S&P 500 Large Cap Index SPX to all-time highs:
However, kicking off this week and with bond yields moving higher again today on Monday, general equities are retracing some of that surge higher and possibly reconsidering the implications of a higher for longer narrative.
Another comment we’ve been hearing a lot about is that the breadth in the markets is starting to narrow once again, and when looking at the Russell 2000 (IWN) as it has not been able to break out to new all-time highs, and has been under pressure since the calendar year turned over.
For that matter, neither have many of the equal-weighted indexes. Here’s a chart of the (SPXEW) S&P 500 Equal Weighted Index, and it absolutely rallied from October along with other markets, but has not been able to eclipse the November 2021 highs to date.
We’ll keep following along with the progress of the general US equity markets, as investors are now fixated on the remaining quarterly earnings estimates in the week ahead, and after big beats in some of the mega-cap tech stocks last week. Never a dull moment.
For now we’ll wrap it up, because we are out of room in this article here on Substack. Part 8B will be a bigger review of the commodities sector and related resource stocks, to give it the time and attention it deserves.
If you haven’t subscribed to my substack channel yet, it is free to do so here:
https://excelsiorprosperity.substack.com/
Thanks for reading and may your trading be prosperous. Ever Upward!
– Shad