February 2, 2024
The Dow Jones Industrial Average posted a fresh record on Friday, managing to recover from Wednesday’s sell-off following the FOMC meeting. As expected, the Federal Reserve voted to hold interest rates steady at its current range of 5.25% to 5.50%, but the official statement following the meeting dashed investors’ hopes for a quick pivot in March. The committee acknowledged the positive trends taking place for both inflation and the broader economy but signaled that the Fed wants to see more convincing evidence that inflation will continue to recede closer to its 2.00% target. Bond and equity markets responded in opposite fashions to the statement. Equity investors, who had bid up markets in recent weeks believing the recent inflation readings would give the Fed cover to cut in March, were disappointed, while bond investors seized on the Fed’s perceived confidence and the eventuality of cuts sometime this year. The U.S. Treasury yield fell below the 4.00% level for the first time in two weeks following the meeting. The positive news for bond investors was short lived, however. Punxsutawney Phil’s prediction for an early spring may have been cheered by equity investors on Friday, but the labor data report cast a long shadow over the interest rate market. The January nonfarm payroll report delivered a monster print of 353K new hires, nearly doubling analyst expectations, while December’s gains were revised higher by an additional 117K. Equity markets brushed off the report, instead choosing to focus on the strong earnings results posted by Meta, Amazon, and Apple. The late week rally helped the Dow Jones Industrial Average close 1.43% higher on the week.
Hot January Jobs Report
Traders eagerly anticipated January’s payroll numbers on Friday, hoping a weaker than expected print would provide the “convincing evidence” the Fed has stated needing before cutting rates. Friday’s report was anything but that – showing businesses added 353K to the payrolls in January, handily topping estimates of 185K. The unemployment rate held steady at 3.70% relative to expectations it would tick higher to 3.8%. Average hourly earnings were much higher as well, rising 0.60% or double the monthly estimate. That pushed the year-over-year rate to 4.50%, placing it above the 4.10% forecast. Weirdly, the wage gains came despite a decline in average hours worked, down to 34.1, or 0.2 hours lower for the month. Job growth was broad-based led by professional and business services, healthcare, and retail. Equity analysts spun January’s report as a sign of a resilient economy, allowing for a soft landing as the Fed moves to cut interest rates later this year. However, the report lends further support to the central bank’s “no hurry to cut rates” mantra. Despite some modest uptick in weekly jobless claims and layoffs from a few high-profile firms in recent weeks, this report clearly shows that the labor market remains strong and is continuing to support consumer confidence and spending. That is a good thing – except when you are still concerned about inflation.
Manufacturers Optimistic for a 2024 Rebound
Manufacturers inched closer to expansion as the ISM Manufacturing Index hit 49.1 in January. That was up from December’s 47.1 reading. Numbers above 50 indicate expansion while numbers below signal contraction. New orders, production, and imports all helped drive manufacturing higher in January. Prices, however, rose 7.7 points to 52.9 on rising raw materials prices. The ISM Manufacturing Index follows last week’s S&P PMI reports which showed an increase in demand. The uptick in the ISM is consistent with the hiring seen in Friday’s jobs report, which showed goods producing jobs growing as a percentage of all jobs added over the last six months.
For weeks we’ve been in a “bad news is good” type of market where every release is assessed relative to the implication it bears on the Fed’s interest rate path. Why then, in a week with blowout earnings and a monster jobs report, were equity markets higher? The short answer is Tech. Meta, Amazon and Apple all announced on Thursday evening, handily beating estimates. Meta, in particular, rewarded investors with a 25% increase in sales, Q4 profits that tripled, a $50 billion stock buyback and the announcement they will institute a quarterly dividend for the first time. Putting that news on a tech weighted market and good things happen. Had the Fed meeting and jobs report been released absent the tech euphoria, we would likely be talking about the market consternating over rates remaining “higher for longer”. Jobs and earnings strength is a good problem to have and one that Powell acknowledged during his post-meeting news conference. “This is a good situation. Let’s be honest. This is a good economy. We do expect growth to moderate. Of course, we’ve expected it for some time, and it hasn’t happened”, said Powell. The market is expecting six rate cuts this year. The Fed only penciled in three and with data continuing to come in strong, even that may be unlikely. This week’s results from the tech sector may have provided cloud cover and prevented the interest rate shadow from being seen, but clearer skies in the weeks ahead will certainly cause the debate to be revisited again soon.
The Week Ahead
Next week will be relatively light for economic news with reports on ISM Services and the U.S. trade deficit.
Groundhog Day All Over Again
Today is Groundhog Day which has been celebrated in the U.S. since the 1800s. The tradition began in Punxsutawney, Philadelphia with a namesake groundhog named Punxsutawney Phil predicting the timing of spring. On February 2nd each year, if Phil sees his shadow and returns to his hole, then the legend says that he has forecast six more weeks of winter. If he does not see his shadow, then the rodent meteorologist is said to predict an early spring. It seems quite illogical that overcast days signify the coming of spring while sunny days mean an extended winter. The contradictory “darkness means spring” may have its origins in the 4th Century Christian feast of Candlemas that takes place on February 2nd, midway between the winter solstice and the spring equinox.
A Candlemas proverb says, “If Candlemas be fair and bright, winter will have another flight; If Candlemas bring clouds and rain, Go, winter, and come not again.” It may represent a belief that either the worst is over if it’s a cloudy day, or may serve as a warning to not be too optimistic if it’s a sunny day. In ancient times, seasonal turning points such as solstices and equinoxes held significant communal importance as they marked key moments in the agricultural calendar. The turning points were commemorated with festivals, traditions, and rituals, including weather prognostications, to align activities with the changing seasons. During Candlemas, candles are blessed in the church to serve as a source of light and warmth during winter. The tradition of a badger becoming the Candlemas weather prophet is believed to have originated from ancient Celtic practices in parts of Europe that later adopted Germanic languages. When Europeans brought the holiday to the U.S., primarily through German-speaking immigrants, including the Pennsylvania Dutch, an American groundhog became the stand-in for the badger. This morning, Punxsutawney Phil did not see his shadow at Gobbler’s Knob, so, per tradition, that means an early spring according to longstanding folklore.
Phil’s annual fifteen seconds of fame has led to other animal weather oracles popping up across the country. These include Birmingham Bill, Staten Island Chuck, General Beauregard Lee in Georgia, Woodstock Willie in Illinois, French Creek Freddie in West Virginia, Unadilla Billie in Nebraska, and Buckeye Chuck in Ohio, to name a few.
Not to be outdone, parts of the country where groundhogs are not indigenous have introduced their own traditions. Oregonians are “beaver believers” and rely on a beaver named Filbert or “Fil” who makes his prediction by choosing and felling one of two small saplings, each with a prediction tied to it. Fil is apparently right about half of the time. In Nevada, a desert tortoise named Mohave Max has been predicting the weather for 24 years. When Max emerges from his winter burrow, that’s when Nevada believes it’s spring. Last year, the date was April 24th. In Austin, TX, people gather on February 2nd in an informal ceremony to see if an armadillo named Bee Cave Bob sees his shadow, but the organizers confess that they often predict an early spring regardless of what happens to make sure the crowd goes home happy.
Today, the annual festivities in Punxsutawney are presided over by local dignitaries known as the Inner Circle whose members conduct the official proceedings while wearing top hats. Phil speaks in “groundhogese” to a member of the group who can understand and translate Phil’s prediction. Groundhogs are said to be good weather predictors because they must know when to emerge from hibernation to mate and to provide their offspring with the best chance of survival. If the babies, called kits or cubs, are born too early, there may not be enough food for them. If they are born too late, they may not be able to gain enough weight for winter.
However, the National Oceanic and Atmospheric Administration (NOAA) has been keeping score on Phil’s predictions. NOAA reported that over the past 10 years, Punxsutawney Phil has only been right 30% of the time. Perhaps we should flip a coin instead?