Right said Fed: Thursday data supports Powell narrative

RIGHT SAID FED: THURSDAY DATA SUPPORTS POWELL NARRATIVE (1131 EST/1631 GMT)

Data released on Thursday played like a denouement to Wednesday's Fed Follies, showing labor market tightness, cooling price pressures and softening demand for goods.

The number of U.S. workers filling out first-time applications for unemployment benefits (USJOB=ECI) unexpectedly eased last week to 183,000, well short of the even 200,000 analysts expected.

It marks the third straight week below the 200,000 level, the bottom part of the range associated with healthy labor market churn, and provides further evidence - as if we needed it - of an unusually tight labor market.

"Labor market data supports continued upward wage pressure even as other economic data releases are slowing and inflation is coming off the highs," writes Thomas Simons, economist at Jefferies. "Data releases like this are why policymakers continue to reiterate their intention to raise rates higher before pausing."

Ongoing claims (USJOBN=ECI), reported on a one-week lag, also landed below consensus, edging down by 11,000 to 1.655 million, inching further down from the 1.7 million pre-pandemic level.

But on the other hand, worries over economic softness and a looming potential recession are having some effect.

The number of planned layoffs jumped by 136% last month to 102,943, 440% more than in January 2022, according to executive outplacement firm Challenger, Gray & Christmas (CGC).

"We're now on the other side of the hiring frenzy of the pandemic years," said Andrew Challenger, senior vice president at CGC. "Companies are preparing for an economic slowdown, cutting workers and slowing hiring."

Delving into the report, tech companies continue to slash their headcount to position themselves for a possible economic downturn, accounting for a hefty 41,829, or 41% of the total.

That's a 158% monthly increase and dwarfs the year-ago number of a mere 72.

Here's a look at the seeming disconnect between claims and Challenger, with a reminder that there's a lag time between layoffs being announced and the actual distribution of pink slips:

A separate report from the Labor Department shows labor cost growth (USLCP=ECI) cooled more quickly than anticipated in the fourth quarter while and productivity (USPROP=ECI) surged past economist estimates.

Labor costs rose 1.1% on a quarterly annualized basis in the closing months of 2022, a sharp deceleration from the third quarter's 2.0% print and well below the 1.5% consensus.

For the year, however, labor costs jumped 5.7% - much too hot for the Fed's comfort.

On the other hand, productivity growth - output per worker per hour - accelerated to 3.0% from 1.4%, blasting past the 2.4% analysts predicted.

Even so, the report "does little to change the bigger picture that productivity growth has been historically weak over the past few years," says Michael Pearce, lead U.S. economist at Oxford Economics. "With wage gains still easily outpacing productivity growth, unit labor costs are rising far too quickly to be consistent with inflation falling back to the Fed's 2% target."

And finally, new orders for U.S.-made merchandise (USFORD=ECI) rebounded in December, rising 1.8% following the prior month's 1.9% drop.

The bounce was less impressive than the 2.2% gain the Street anticipated.

Some cold comfort could be found in the revision of new orders for core capital goods. The data series - which excludes aircraft and defense items and is considered a barometer of U.S. business spending plans - now shows a nominal 0.1% decline in new orders, an improvement over the initially reported 0.2% drop.

The larger picture, expressed by domestic and world PMI data, is that manufacturing both at home and abroad is in contraction.

Wall Street is bowling a split in early trading, with the Nasdaq surging, the S&P joining that index in green territory, while the blue-chip Dow headed south, weighed down by healthcare S5HLTH and industrials S5INDU.

(Stephen Culp)

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TO BELIEVE OR NOT TO BELIEVE THE FED (1043 EST/1543 GMT)

Reading between the lines of Federal Reserve Chair Jerome Powell's responses to reporters on Wednesday after the interest rate hike was announced, traders seemed to conclude that the end of increases to borrowing costs could be in sight.

The ensuing market rally suggested some skepticism about Powell's suggestion that we're talking about a "couple" more rate hikes to get to an appropriately restrictive stance.

Investors said he cultivated their disbelief by noting that he could say for the first time that we are in the early stages of disinflation, and also by NOT suggesting they had been getting over-excited by easing financial conditions.

Still, not everybody was ready to stop believing:

"The market is rallying despite what the Chairman said and not because of what he said," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte.

"He’s been very clear that they are going to raise rates at least two more times (unlike one more time, which was consensus) and that their job is not done and that they would rather overdo raising rates than underdo it. The Fed is failing to convince the market that they have the fortitude to stick with restrictive monetary policy until inflation has been reduced to 2%. The market is testing the Fed’s resolve and is going to rally until it is proven wrong."

Looking at Wednesday's rally and the market's gain so far this year, Zaccarelli cautioned: "Personally, we wouldn’t fight the Fed, but clearly more people are willing to do so than you would expect."

The CIO was not alone in his doubting of the market.

"While the Fed has made progress, it has not yet won the war on inflation, and we see markets as too optimistic about the trajectory of rates in 2023 and beyond," said Robert Bayston, head of U.S. government and mortgage portfolios at Insight Investment.

Also Ali Hassan, portfolio manager & managing director at Thornburg Investment Management, warned in a research note that:

"An easing in financial conditions (that is, lower market interest rates, tighter spreads, higher equity prices) is counterproductive to controlling inflation. The Fed will likely have to start more hawkish talk in order to walk back Powell's comments on financial easing."

Some seem convinced that markets are in for more turmoil if the economy turns sour, in line with their expectations, and that if the Fed ends up taking a more dovish turn it may be because of a recession.

One commentator had to turn to gothic horror literature to interpret Powell's comments.

"It’s like he’s trying to be two people, he’s trying to be Dr Jekyll and Mr Hyde and he’s saying yes we could hike more, obviously more rate hikes are coming according to the statement, but then he just wanted to talk about the disinflation process, he kept highlighting the progress…" said Edward Moya, senior market analyst at Oanda, New York.

(Sinéad Carew, Herbert Lash, Karen Brettell)

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FANGs GET REAL, S&P 500 GETS GOLDEN (1010 EST/1510 GMT)

The S&P 500 SPX is rallying more than 0.5% and the Nasdaq IXIC is up nearly 2% early on Thursday as Meta Platforms surges on rigorous cost controls, while a less-hawkish message from Federal Reserve Chair Jerome Powell boosted bets of a softer landing for the U.S. economy.

With Meta's META near 20% thrust, the FANG index NNYFANG is on fire. NYFANG is significantly outperforming, posting a more than 4.5% gain.

Meanwhile, as stands, the S&P 500 is seeing a golden cross as its rising 50-day moving average (DMA), now around 3,953, is crossing above its descending 200-DMA, now around 3,951.

The 50-DMA has been below the 200-DMA since it crossed under it on March 14, 2022.

Traders will be watching to see how this plays out into the close.

Here is a snapshot of where markets stood shortly after 1000 EST: