- Friday's job data are contradictory on the surface -- lots of jobs but little gain in wages -- but the purchasing management numbers were hot.
- New data is not remotely soft enough to stop the Fed, or even to slow it.
Financial markets are freezing like the scenes in sci-fi movies, jagged lines of frost hissing and crackling across trading floors.
On election day the S&P (Standard & Poor) 500 was 2139. By December 20, elated by coming stimulus, tax cuts and regulatory relief, the index reached 2270.
Two months later, add only 26 points — 16 of those Friday in foolish hope that new data will hold back the Fed. The 10-year T-note on election day was 1.86 percent, three weeks later 2.45 percent, and today…2.45 percent.
Jobs and purchasing reports
Markets are in the business of second-by-second re-pricing of new information — first, new economic data — and then trying to evaluate the future. But economic data is inherently back-looking, so we hang on every numeral and dot from the most recent period. Stuff like revisions from mid-2016, we ignore altogether.
The most-recent data each month are the job stats released on the first Friday, and the twin surveys of purchasing managers (ISM) in the first week.
Friday’s job data are contradictory on the surface — lots of jobs but little gain in wages. The twin ISMs are hot (50 is breakeven): manufacturing rose to 56.0 from 54.7 and the service sector little-changed at 56.5 — sub-categories in both showed strong price pressure and new orders.
What’s it mean for rates?
Some analysts today say these reports take pressure off the Fed to hike again as early as March.
Right there, financial markets depart from hard data and trends and must begin to evaluate future policy. “Policy” means the Fed and the rest of the federal government, and today, often policies of foreign governments.
The Fed is not so hard: just pay attention to what they say they’re going to do. The Fed tries hard not to surprise markets, and so tells us all it can about its plans.
Friday it could not be more clear: It intends to raise the overnight cost of money from a state excessively easy, no longer necessary to help the economy, and depending on incoming data may at some point in a year or two or three begin to lean against growth. But right now, the Fed plans to “remove excess accommodation.”
Period. The Fed is coming again soon, and repeatedly. New data is not remotely soft enough to stop the Fed, or even to slow it.
Markets and the new administration
Federal government policy matters because it affects so much of the economy. But the government is so big and leadership so scattered that it’s hard to handicap what it will do — can do, or with what effect if it does something. Or doesn’t.
Our government tends to get big things done early in the first term of new administrations. A new president arrives with some mandate for action, even if not specific.
Results from new administrations correspond to focus. The effective ones pick a few issues (three or less) on which to apply all political capital — our government requires that force to get anything done.
Obama used his capital on healthcare reform, fiscal stimulus and Dodd-Frank. That agenda was at odds with the political center and begat a violent reaction in the 2010 Congressional election and all the way to the state level.
Dubya got an enormous tax cut through, then 9/11 and Iraq ended further ambitions. Clinton accomplished an extraordinary budget fix in his first two years, but nothing else big.
Markets are frazzled by Trump. No matter how any trader feels about the man or his politics, we have less idea each day what is coming than the day before. Un-biased thinking (there is such a thing) is still trying to grasp: Will he settle down? Will he learn on the job? Will the good people he has appointed offset the screwballs? How dangerous are the screwballs? Is his agenda moving through Congress? What will come out the far side?
Everyone at a trading desk, every investment manager, is conditioned to listen to what government says and react. Even our government, when it discovers it’s made a poor statement, corrects itself. It does not entrench error.
But now it is unreliable. Small example: Trump has repeatedly and recently insisted that China is manipulating its currency weaker. Everyone in markets knows that China is desperately trying to prevent weakening.
Way back in Psych 1 we learned to train lab rats. Bribed by Rice Krispies or jolted by a weak shot of electricity, they would learn extraordinary sequences of behavior.
One experiment, which seemed cruel at the time and still does today: randomize the reward or punishment. The rats would then try all sorts of behavior, trying to find the new pattern. Finally, exhausted in the mind, a new jolt — and the rat would sit still and shake.
Markets are a hair smarter and a lot stronger. We’ll sit shaking in narrow ranges, trading on the limited reliable information available.
But, when we finally figure out the experiment, we’re prone to knocking the experimenter flat on his keister.
10-year T-note in the last year
10-year T-note in the last year, bouncing in-range since the end of November, trying to figure out the experiment.
The Fed-sensitive 2-year
The Fed-sensitive 2-year… so frozen since December that you could skate on it. However, unlike the 10-year, traders know what’s ahead, just not exactly when or how often. The Fed is coming.
Source is Bureau of Labor Statistics. One could argue that there is an upward trend underway, the drops in the last data points just wobbles. But one would be perilously close to an alternative fact. There is no inflation hazard present, but the Fed is in pre-emptive mode.
The chart above has a very long and irregular time scale designed to emphasize periods of change. A lot of smart and honest people have tried for years to explain the productivity downshift 2007-2016, less than half of the 70-year average. The dominant explanation has been the financial crisis, but that’s wearing thin; demographics and globalization are rising as alternates.
Until we have a better grasp of cause we’ll not have a good idea what to do to improve. For a full discussion of productivity, and the chart, go here.
Core personal consumption expenditure (PCE) is the Fed’s favorite, the black line the change year-over-year. One could argue that it is rising toward the Fed’s 2 percent target, but could argue just as well that nothing has happened in five years or now. The most recent points of data may be pulled down by the strong dollar.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
