Wall Street surged on mixed US job data and tech earnings

Wall Street Futures recovered from the Fed’s hawkish hold low Thursday on earnings boost and hotter than expected jobless claims data. On the earnings front, Wall Street was boosted by upbeat report cards from Walgreens Boots, Amgen, Meta, Amazon, Nvidia Chevron and Exxon Mobil while dragged by Apple (disappointing sales in China), and various regional banks led by NY Community Bancorp. On Friday all focus of the market was on the NFP/BLS job report for January, which may influence the Fed for an early or delayed rate cut stance.

On Friday, the latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +353K payroll jobs in January against +333K sequentially (m/m); +482K yearly (y/y), and much higher than the median market expectations of +180K.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for November was revised by +9K to +182K, and the change for December was revised by +117K to +333K. With these revisions, NFP employment in the last two months combined was +126K higher than previously reported (against a 2M revision of -71K in the last report).

Meanwhile, the BLS made its 2023 annual benchmark revision to earlier data, adding +359K jobs to 2023’s total gains. With the latest annual and monthly revisions, the US economy added an average of +255K payroll jobs per month in 2023 (vs +225K earlier) against +377K in 2022 (vs earlier +399K), +604K in 2021 (vs earlier+562K), and the pre-COVID (2019) average of +168K (against the Fed’s targeted goldilocks rate of around +200K). The 6M rolling average of NFP job addition is now around +248K

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +317K payroll jobs in December from +278K sequentially (m/m) and +359K yearly (y/y), higher than the market expectations of +155K, and also way above the ADP figure +107K (released Wednesday). After the latest revisions, the 2023 YTM average is now around +197K vs. the ADP average of +209K in 2023. The 6M rolling average of NFP private job addition is now around +199K vs. +125K ADP survey. The 2022 average of NFP Private Job addition was +352K vs. ADP average of +322K. Overall, the NFP and ADP private payroll job data is still quite divergent.

The Government payroll, i.e., employment in Federal and state/local governments, was increased by +36K in January against +55K addition sequentially (m/m); +123K yearly (y/y), and higher than the market expectations of +25K. After the latest revision, the YTM average is now around +57K in 2023 against the 2022 average of +25K and +33K in 2021. The 6M rolling average of NFP government job addition is now around +50K. In the election year of 2023; the government payroll job addition is quite upbeat and now running around the pre-COVID Jan’20 levels of +60K. In 2023, Government payroll addition has been quite upbeat for the last few months including December and consistently beating market expectations.

In Jan’24, notable NFP job gains occurred in professional and business services (+74K); health care (+70K), namely ambulatory health care services (+33K) and hospitals (+20K); retail trade (+45K); and social assistance (+30K). Employment also increased in manufacturing (+23K) and government (+36K). On the other hand, the mining, quarrying, and oil and gas extraction industry lost -5K jobs.

Overall, private education and healthcare services were the biggest employers in the last 12 months, followed by government and leisure & hospitality (travel/tourism & hotels). The U.S. economy is primarily a service sector economy (unlike China) and the service sector is the biggest contributor to the economy.

As per the ADP survey, the number of private employees was around 129416K in December against 134229K as per the BLS survey. The difference (4813K) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few months may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report.

As per the ADP survey, the number of private employees was around 131342K in January against 134609K as per the BLS survey. The legacy average difference (around 3000K in 2023) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few years may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report.

In the household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll. In this way, there was a difference in private payroll workers between the NFP and ADP surveys since the beginning.

The Household survey includes payroll employees and self-employed persons such as gig workers/freelancers, contractors, and agricultural workers. In the household survey, individuals are counted only once, even if they have more than one job. In the establishment survey, employees working at more than one job (multiple job holders) are counted separately for each payroll.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has deducted -31K employed persons in Jan’24, against the contraction of -683K sequentially (m/m) and addition of +852K yearly (y/y). The U.S. has around 161152K employed persons in Jan’24., eased from the recent life time high around 168127 scaled in Nov’23. But it may soon scale 162000K by the next few months.

After the Dec’23 annual revision (2019-23), the 2023 YTM average of the addition of employees and self-employed persons is now around +157K, substantially lower than +265K in 2022. The YTM average of the addition of employed persons was +265K in 20222, +511K in 2021 -738K in 2020 (COVID distorted), and +169K in 2019 (pre-COVID average).

As per household survey data (after 2023/annual updated population estimate/control revised factor, the nominal number of the civilian labor force decreased by -175K in Jan’24 to 167276K. The nominal number of the labor force was around 165871 in Jan’23 and 164448 in Feb’20 (pre-COVID). The average number of additions in the labor force was around +204K against an average number of additions of employed persons +157K in 2023 (after the Dec’23 annual revision), which made the overall average in line with pre-COVID (2019) +169K.

The labor force participation rate was unchanged at 62.5% in Jan’24 from 62.5% sequentially, near the highest since Feb’20 (pre-COVID). The labor force participation rate was 63.3% in Feb’20 (pre-COVID). The average labor force participation rate is now around 62.6% in 2023. But the labor force participation rate also eased in Jan’25 from a recent high of 62.80% scaled in Nov’23.

As per Household survey data, the nominal number of unemployed persons decreased by -144K to 6124K in January against 6268K sequentially (m/m) and 5719K yearly (y/y). In Jan’24, the U.S. unemployment rate was unchanged at 3.7% sequentially (m/m) and 3.4% yearly (y/y). The market was expecting an unemployment rate of 3.8% in Jan’24 with a higher labor force participation rate at 62.6%.

The U.S. Average Hourly Earnings (AHE) was around $34.55 in Jan’24 vs $34.36 sequentially (+0.55%) and $33.07 yearly (+4.48%). The U.S. AHE grew +4.5% yearly in Jan’24 against +4.3% in Non’23 and higher than the market expectations of +4.1% (y/y), and the highest since Sep’23. Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.25% on average for its +2.0% price stability targets (as per the pre-COVID trend), whereas the YTM average for 2023 was around +3.83%.

On a sequential (m/m) basis, the AHE grew by +0.6% in Jan’24 from +0.4% in Dec’23, above market expectations of +0.3% and the highest sequential growth since Mar’22. The average hourly earnings (AHE) for all employees on US private nonfarm payrolls rose by +$0.19 sequentially to $34.55 in Jan’24 against $34.36 in Dec’23. The Fed needs an average sequential AHE growth of around +0.2% for its price stability targets, while the 2023 average is now still around +0.4%.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged down to 34.1 hours in Jan’24 from 34.3 hours sequentially (m/m), 34.6 hours yearly (y/y) lower than the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) decreased -0.03% to $1178.16 in Jan’24 from $1178.55 sequentially, while increasing +2.97% yearly from $1144.22. This translates to average monthly earnings (AME) of around $4712.52 in Jan’24 vs. $4714.19        sequentially (-0.03%) and $4576.89 yearly (+2.97%); i.e. the AME contracted -.0.03%% sequentially (m/m) and +2.97% yearly (y/y) in Jan’24.

The average monthly growth of U.S. AME is now around +0.3% sequentially (m/m) and +3.84% yearly (y/y) against CPI growths of +0.3% (m/m) and +4.14% (y/y); i.e., there were still no wage-inflation spirals and real wage growth is still negative. But the 6M rolling average of real wage growth is now positive at +0.46% against the H1CY23 average of -1.08%.

In brief, the Jan’24 NFP/BLS job report may be termed as mixed rather than blockbuster:

·         A substantial beat in the headline NFP job addition number in Jan’24 came on the back of substantial annual revision; overall January NFP job addition is in line with previous trends and the overall 2023 average is 255K against 377K in 2022

·         As per the Household survey, the number of employed persons contracted in Jan’24 by -31K after -683K in Dec’23; the overall average number of employed persons for 2023 was around +157K against +265K in 2022 (after the latest annual revisions); this is a goldilocks rate for Fed

·         Without the latest population control effect, there would be an addition of +239K employed persons in Jan’24 instead of -31K

·         Although Average Hourly Earnings (AHE) were higher than expected, overall Average Weekly Earnings (AWE=AWE*AWH) decreased -0.03% and also moderated around +3.0% annually (y/y) due to lower AWH (Average Weekly Hours)

·         The last 6M rolling average of real wage growth is around +0.4% (y/y), almost flat and not indicating any wage inflation spiral, supportive for the Fed’s wait & watch stance

·         Overall, the latest US job report continues to support soft & safe landing, being goldilocks in nature

Conclusions:

The 12M average between the US core CPI and core PCE inflation is now around +4.5%, which the Fed may consider as underlying core inflation, the target of which is +2.0% on a durable basis. The 6M rolling average of core inflation (PCE+CPI) is now around +3.9% or around +4.0%.

Fed may cut 75-100 bps in H2CY23 if the 6M rolling average of core inflation (PCE+CPI) indeed eased further to +3.0% by H1CY24.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(4.50.00-2.00) =0+2+2.50=4.50% (for 2024)

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation for CY23

Fed has to ensure a 2% price stability (core inflation) target keeping the unemployment rate below 4% and also 10Y bond yield below 5.00-4.50% so that borrowing cost for Uncle Sam remains manageable/sustainable to fund +34T debt (never-ending).

In any way, at the current run rate and trend, the average US core PCE inflation should be around +4.0% in 2023, +2.5% in 2024, +2.1% in 2025, and +1.5% in 2026, in line with Fed’s Dec’23 SEP. Similarly, the U.S. core CPI inflation average should be around +4.6% in 2023, +3.2% in 2024, +2.5% in 2025, and +1.8% in 2026.

If US core CPI indeed dips below +3.0% by May-June’24 and if it seems that the 2024 average core inflation will be around +3.2%, then the Fed may start cutting rates from July’24 and may cut cumulatively 75 bps at -0.25% pace till Dec’24 for a repo rate at 4.75%, so that core real rate continues to stand around +1.50%, in line with the present restrictive stance (5.50% repo rate-4.00% average core CPI for last 6M).

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut (dovish jawboning) from Mar’24 (Q1CY24) to ensure a soft landing while bringing down inflation. Also, whatever the narrative, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 15% of its revenue as interest on public debt against China/EU’s 5.5%.

As a result of higher bond yields around 4.50%-5.00% (for 10Y UST); i.e. lower bond prices, the Fed is now in deep MTM loss for its huge bond holding. Fed is also providing higher interest to banks & financials for reverse repo operation than it getting under repo operation; i.e. Fed’s NIM/NII is now negative and theoretically the Fed is in negative profit to the tune of -$130B. The same is also true for various banks & financials, most of which are now in deep MTM loss for higher bond yields; i.e. lower prices for their HTM bond portfolio holdings due to Fed hikes. The US10Y TSY market price fell from around $140 to $105 from Jan’20 (pre-COVID) to mid-Oct’23; i.e. a fall of almost -33% in around 4 years; it recently recovered to almost $113 levels.

This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price & financial stability and soft-landing. Fed has to bring down inflation to +2.0% targets by the  US 10Y bond yield below 4.50-5.00%, and an unemployment rate below 4.0% without triggering an all-out or even a brief recession in the US Presidential election year (Nov’24). The Fed will ensure that the US10Y bond yield is below 4.50-5.00% at any cost for lower borrowing costs for Uncle Sam (U.S.), everything being equal. Thus, overall Fed is methodically jawboning on both sides (hawkish/dovish) from time to time to achieve all its goals at the same time.

Considering all pros & cons, Fed may wait for core inflation data (average for core PCE and core CPI) for at least Dec’23-Mar’24 and if it goes down to around +4.00% from the projected 2023 average of +4.5% (4.80% core CPI and +4.20% core PCE), the Fed may cut rep rates/FFR by -25 bps in July; further if such disinflation trend continues, Fed may cut -25 bps each in September and December for a cumulative -75 bps.

We may see a synchronized global easing from H2CY24. As the Fed is the world’s unofficial central bank because the USD is the ‘King’ (the world’s most preferred FX or global reserve currency), all major G20 central banks are now bound to follow the Fed policy stance to maintain present policy/currency/bond yield parity, everything being equal.

Thus the market is now expecting a synchronized global easing (rate cuts) by major G20 global central banks including ECB, BOE, BOC, PBOC, and even India’s RBI, whatever may be the domestic macro-economic narrative (just like post-COVID synchronized global tightening to bring inflation down to targets).

Fed policymakers will now jawbone the market in a balancing way to keep the US10Y bond yield between the 3.25-5.25% range or around 4.00-4.50% on an average to maintain price/labor market/financial (Wall Street) and also Main Street/White House stability in the election year (2024). As the U.S. labor market is still robust with healthy wage growths, the incumbent Biden admin may prefer price stability and lower inflation in the coming months along with a sub/below 4% unemployment rate; i.e. price stability over GDP growths. As the 10Y bond is the main instrument for raising debt and a benchmark for US/global borrowing costs, the Fed may not allow it to hover above 5.00% for long under any circumstances, everything being equal. Fed needs to lower borrowing costs for the U.S. government from the present 15% to 10-7% over the next few years.

Fed hiked rate last in July’23 for a +5.50% repo rate and in hold mode with a hawkish stance since Aug’23; subsequently, US10Y bond yield gradually surged from around +3.75% to +5.00% by late November. As a result of higher borrowing costs and tighter financial conditions, the demand of the economy was affected to some extent, resulting in lower inflation. Now Fed has to keep on hold (neutral mode) for at least 10-12 months from July’23, so that the impact of higher borrowing costs is gradually transmitted to the real economy in full, resulting in core inflation back to targets.

Thus Fed has to wait till at least July’24 for the expected 1st rate cut; otherwise, its credibility may be at stake. If the US10Y bond yield again falls below +3.0% in the coming days (from the present +3.95%), then it may cause less restrictive financial conditions, resulting in higher core inflation. Thus Fed has to jawbone the market so that the US10Y bond yield hovers around 4.0-4.50% in the coming days so that the Fed can ensure relatively lower borrowing costs and price stability (soft landing).

Fed has to ensure 2% price stability and below 4% unemployment targets along with financial/Wall Street Stability and also keeping public/government borrowing costs at the lowest possible by directly/indirectly controlling bond yield (like YCC by BOJ). Fed is now targeting 2% core inflation with below 4% unemployment and 4.50% bond yield (10Y US) to keep borrowing costs lowest for the Government.

Bottom Line:

Fed, ECB may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps (synchronized global rate cuts amid a synchronized easing in core inflation); every major central bank has to follow ‘King Fed/USD’, whatever may be the narrative.

Technical trading levels: DJ-30, NQ-100 Future, and Gold

Whatever may be the narrative, technically Dow Future (38765), now has to sustain over 39000 levels for a further rally to 39200/39500 levels in the coming days; otherwise, sustaining below 38850 levels may again fall to 38400-37300 levels in the coming days.

Similarly, NQ-100 Future (17708) now has to sustain over 18000 levels for the further rally; otherwise, sustaining below 17950 may again fall to 17375-16390 in the coming days.

Also, technically Gold (XAU/USD: 2039) now has to sustain over 2045-2055 for a further rally to 2065-2085-2105/2120 and 2130/2152 levels; otherwise sustaining below 2040-2035, may again fall to 2020-2010-2000-1990-1975-1960/1940 in the coming days.