The market performed surprisingly well on Wednesday despite a few clear economic negatives. Two issues are at the forefront currently. The first is the strength in employment that is driving inflation, and the second is that the Fed believes the market is underestimating the central bank's determination to battle inflation.
The JOLTS (Job Openings and Labor Turnover Survey) report on Wednesday indicated that the number of job openings remains very elevated compared to the number of unemployed people seeking jobs. The Fed wants to see the ratio of job openings to unemployed come down to 1.75 or less, which can be accomplished by slowing demand for employees or by more job losses.
Weekly unemployment claims will be released here on Thursday at 8.30 am ET and the December jobs report will be announced on Friday morning. These reports are now more important than the Consumer Price Index (CPI) as the Fed's main focus is on employment-related inflation.
The second issue that is driving the market was highlighted in the minutes of the Fed's last meeting. The Fed is concerned that the market is not taking it seriously enough and is frustrated by how financial conditions keep easing as optimism about a less hawkish Fed periodically occurs.
The market has been celebrating softening in CPI, but several Fed officials are shifting their focus to wages and employment. That is the real problem, and the only way to slow inflation in that area is to suppress the economy.
The Fed remains relatively optimistic about the potential of avoiding a deep recession, which is part of the reason that it does not anticipate any rate cuts will occur in 2023. On the other hand, market participants are becoming more concerned about economic slowing, and that is why they tend to believe the Fed will back off on its hawkishness sooner rather than later.
Market players shrugged off these debates on Wednesday and drove stocks higher on strong breadth. Small-caps led with good speculative action in biotechnology, China-related names and a few other areas.
One of the weaker areas currently is oil and energy. The issue there appears to be growing concerns about economic slowing rather than supply problems.
While buyers wanted to add some long exposure on Wednesday, there is a very high risk of sharp volatility as the economic debate continues. Fed speakers will pick up their activity today and there is an increased risk of negative headlines as a result.