Wentz Weekly Insights
Powell Tempers March Rate Cut Expectations and Mega Cap Stocks Drive Markets Higher
Recent Economic Data
- The number of job openings the last day of 2023 rose to 9.026 million, up about 100k unexpectedly and back to the highest since September, but still down from the high of 12 million in March 2022, and still well above the pre-pandemic trend of about 7 million. The number of separations was little changed at 5.365 million, down about 40k from November, with the level of quits falling 132k to 3.392 million and layoffs rising 85k to 1.616 million (up from 1.475 million a year ago).
- ADP data showed an increase of 107,000 payrolls in January, a little below consensus estimates and down about 50k from December’s hiring levels. Payroll gains were spread between all business sizes as well as industries.
- The number of unemployment claims filed the week ended January 27 was 224,000, an increase of 9k from the prior week, with the four-week average at 207,750. The number of continuing claims was 1.898 million, a jump of 70k from the prior week, and the second highest since the pandemic recovery. The four-week average was 1.841 million, up just 7k.
- Employment in the US increased by 353,000 in January, above economists’ consensus estimate of 170,000 and the largest monthly increase in 12 months. Even more, revisions for prior months was very strong – December was revised to 333,000 from 216,000 while November was revised to 182,000 from 173,000. It is worth noting, the data reflects revisions due to its annual benchmarking process due to updating seasonal factors. Most job gains were seen in professional services, health care, retail, and social, with declines in government and manufacturing. On the other hand, the household data showed the labor force increased 124k and the number of people employed increased 239,000, while the number unemployed declined 116,000. The unemployment rate remains at 3.7% while the underemployment rate (the U-6 rate) increased to 7.2% from 7.1%.
- A bit of a surprise was the household data showed the average wage rose 0.6% in the month, double the expectation for the strongest growth in almost 2 years. For 2023, wages grew 4.5%, accelerating to the strongest 12-month increase since September (and up from the 12-month rate of 4.3% from December). However a negative was people worked less in January (possibly due to weather with a very cold stretch) as average work week fell slightly.
- Overall, a very strong report – job growth was the strongest in a year and wage growth accelerated. This is a negative for those looking for rate cuts. A stronger jobs market and higher wage growth is more evidence the economy remains strong and inflationary pressures remain.
- The employment cost index, a important data release on cost of employment that the Fed likes to use, rose 0.9% in the fourth quarter compared to the quarter prior, and increased 4.2% from a year earlier, slightly lower than the 4.3% annual increase from Q3. Wages and salaries increased 0.9% while benefits increased 0.7%. Wages and salaries are up 4.3% from a year ago (versus 4.6% in Q3) while benefits increased 3.8% over the same period (vs 4.1% increase in Q3). The employment cost index annual change peaked around 5.2% the beginning of 2022, and has only slowly moved lower and for comparison purposes pre-pandemic was trending about 2.5%-3.0%.
- U.S. worker productivity (also known as output per hour) increased 3.2% in the fourth quarter (the change from the prior quarter and annualized), well above the estimate of 2.3% but a big slowdown from the third quarter’s very solid 4.9% increase (which was revised down from 5.2%). The 3.2% increase in productivity was due to a 3.7% increase in output and 0.4% increase in hours worked. For all of 2023, productivity was more muted, increasing just 1.2% (2.6% increase in output and 1.3% increase in hours worked). Meanwhile, unit labor costs increased 0.5%, much less than expected, reflecting a 3.7% increase in worker compensation and the 3.2% increase in productivity. Remember, productivity growth is one of the drivers of long-term economic growth.
- The US PMI manufacturing index was 50.7 for January rising from 47.9 the prior month for the strongest improvement in manufacturing conditions since mid-2022 and the first time over 50 (the breakeven level – over 50 indicates growing conditions) since April 2023. Growth was supported by a bounce in new orders and a slower decline in output as production remained weak, while input prices reaccelerated as price increases hit a 9-month high.
- The ISM manufacturing index was 49.1 for January, reflecting a smaller decline in manufacturing conditions compared to 47.4 from the month prior, however the index has been below 50, reflecting contracting conditions, for 15 consecutive months. New orders saw growth again, improving to 52.5 while production improved slightly. The prices index increased back into “increasing” territory as the report notes new 2024 pricing levels went into effect.
- Construction spending continued its solid growth in December, rising another 0.9% in the month and doubling expectations. The amount spent on construction has consistently surprised to the upside for about a year now. Spending increased 1.4% on residential and increased 0.4% on nonresidential. Compared to a year ago total spending is up 13.9%, driven mostly by a 20.1% increase in nonresidential spending but also a 6.8% increase on residential as it bounces back after a soft first half of 2023.
- The monthly Case Shiller home price index showed home prices in the U.S. fell 0.2% in November, the first monthly decline since January (however, rose 0.1% on a seasonally adjusted basis). The decline coincides with when mortgage rates peaked (end of October, beginning of November), so the expectation is price increases will pick up pace again. The index reported a 5.1% annual increase in home prices in November, up from 4.7% the prior month. Northeast and Midwest markets reported the largest price increases with the West seeing the smallest increase, but the spread between regions was the most narrow since the beginning of 2021.
- The Consumer sentiment index for January showed consumers feelings about the economy was the best since mid-2021. The index rose to 79.0 with current conditions index dropping 1.5 points to 81.9 and expectations index increasing to 77.1 for the best since mid-2021 as asset prices rose to new highs. Inflation expectations did not change much from last month – one year inflation expectation were at 2.9% while longer term expectations were at 2.9%.
- Walmart said its shares will undergo a 3-for-1 stock split. The company said the split was part of its “ongoing review of optimal trading and spread levels and its desire for its associates to feel that purchasing shares is easily within reach.” The split will occur after the close on February 23.
- Elon Musk’s $55 billion pay package, which was a performance based stock option grant that was approved in 2018 by the Tesla Board, was rejected by a Delaware judge who said the pay was unduly approved. This comes after a Tesla shareholder filed a lawsuit saying the pay package was excessive. The pay package started at $0 and was only increased if Tesla stock reached certain milestones up to $650 billion, which the stock did achieve. According to Bloomberg, without the stock options, Musk’s net worth would drop to about $154 billion, making him the third wealthiest person in the world.
- Another round of tech layoffs were announced last week, including from companies like PayPal, Block, Okta, Zoom, and Snap, as well as UPS and the Wall Street Journal. According to layoffs.fyi, the total tech layoffs year-to-date are at about 32,000 from over 120 tech companies.
- Byron Allen, media mogul known for founding Entertainment Studios, made a $14.3 billion offer to acquire Paramount Global, parent company of CBS and Viacom. The offer represented about a 50% premium to where shares were trading prior to the announcement. Later, a report from the NY Post said Paramount’s board has formed an independent committee to explore strategic alternatives.
- A report by the WSJ said Intel is delaying the construction for its $20 billion chip manufacturing plant outside Columbus, OH. The report said the delay was due to “business conditions, market dynamics and being responsible stewards of capital.” It initially planned to start construction next year but now will not be until 2026.
- Disney will be taking a similar step as Netflix and will begin enforcing password sharing for Hulu, Disney+, and ESPN+. CEO Bob Iger recently said on the last earnings call that the company was looking to improve its streaming business by implementing stronger standards on password sharing, but that is not expected to have a meaningful impact to financials until 2025.
- China’s stock market, measures by the CSI 300 index, an index of 300 stocks on the Shanghai and Shenzhen Stock Exchanges, extended its losses last week and fell to a new 5 year low. China has been exploring different ways to provide a boost for its economy and markets, announcing rate cuts and early last week implementing curbs on short selling stocks (a bet that stocks will go down). Not helping last week was data on its manufacturing industry that showed the fourth consecutive month of contracting activity. Chinese officials have reportedly remained busy looking for ways to boost confidence and investor sentiment.
- The House passed a $78 billion tax bill last week that includes business and child tax breaks. House Speaker Johnson took the vote to the floor despite opposition from a group of Republicans. According to Bloomberg, the bill includes child tax credits which would be paid for by the ending of employee retention tax credit to employers from the pandemic, but Republicans say that credit was not paid for in the first place so it shouldn’t be used as an excuse to pay for the child tax credits. For businesses, the bill would bring back tax breaks allowing business to recoup the costs of interest expense, and R&D, which would benefit companies with large capital/research expenses. Also, the Senate introduced a separate $118 billion bill on border security that includes additional aid to Ukraine and Israel. Republican House Speaker Johnson had already said the bill would be dead on arrival in the House and that it was “worse than we expected.” According to Reuters, the bill includes $20.2 billion on border security, $60 billion to support Ukraine, $14 billion to support Israel, $2.4 billion for the conflict in the Red Sea, and $4.8 billion for Indo-Pacific allies facing aggression from China.
- Stock and bond markets saw a rally to start the week after the Treasury announced borrowing estimates for the first quarter of the year. The Treasury said it expects to borrow $760 billion from January through March, down from its previous projection of $816 billion, sending bond prices higher as lower borrowing equates to lower supply of new Treasuries. Markets were expecting something higher due to rising budget deficits. The Treasury said the lower borrowing was because of higher net fiscal cash flows and having more cash on hand when the quarter began than expected.
- The Bank of England held its rates and policy unchanged in a 6-3 vote where 2 voted for another rate hike and 1 voting for a cut. It said it expects inflation to decelerate to the 2% target temporarily in Q2 but increase again in Q3 and Q4. It removed the statement that more rate hikes may be needed.
Did You Know…?
Meta’s Record Day
Economic & Market Outlook Meeting
The Week Ahead
We are almost halfway through earnings seasons, and this week another wave of quarterly earnings reports will be the biggest highlight, with about 20% of the S&P 500 components reporting this week but more reports from smaller companies. Notable quarterly earnings will come from Caterpillar, McDonald’s, Tyson Foods on Monday, Chipotle, Toyota, Ford, Spotify, BP, on Tuesday, CVS, Fox, PayPal, Uber, Disney, Alibaba on Wednesday, Expedia, Pinterest, Kenvue on Thursday, and PepsiCo on Friday. The economic calendar is very light on data releases, with only the ISM services index on Monday, trade data on Wednesday, and jobless claims on Thursday. After last week’s Fed meeting, policymakers will be active this week in public appearances and we expect to hear many comments on policy throughout the week from many district Presidents.