There will be some kind of macroeconomic data released almost daily between now and the Federal Open Market Committee's next official policy statement on Jan. 26. This is the "big one," however. The Atlanta Fed's GDPNow model, which is more a snapshot and less a predictor, now shows fourth-quarter economic growth at a lofty but quickly fading 6.7%. Next Friday's double release of December retail sales and December industrial production will directly impact that model, and given that most December data points have been hurt by the spread of the Omicron variant, the model will probably end up dragging the whole quarter somewhat lower.
Don't know about your neck of the woods... you can find meat, eggs and bread on Long Island, but not likely all at the same grocer. Economic activity has been slowed by the lack of available labor. That circles us back to December's employment situation, which would be worse if the survey were done later in the month despite the conclusion of the holiday shopping season.
While these numbers will not fit into GDP modeling, everything results from labor and the demand for labor, and these numbers, along with guidance for overall economic growth (very likely to show significant deceleration for the early part of the first quarter), will provide the FOMC with the very latest data as it proceeds with attempting to set up markets and the everyday economy for the possible implementation in March of an actual change in trajectory (no simple thing) in monetary policy. In other words, this Friday morning's numbers and next Friday morning's numbers (which will include large bank earnings) really, really matter.
What to Watch
The committee (FOMC) will be decidedly more hawkish this year, at least until the Biden administration can get some nominees for the Board of Governors past the Senate. In addition to taking control of what strikes fear in their hearts -- i.e., more than simply elevated consumer-level inflation -- the committee seeks "full employment." What so many economists miss is that there is no magic number such as a 4% or 3% unemployment rate.
The unemployment rate makes everything look nice, as does the 7.4% underemployment rate, but the fact is that labor markets cannot be at full employment if the economy itself is not. This is so simple, yet so often missed. Does anyone really think with sub-62% participation that either the U.S. economy or labor markets can be fully employed? Wake up. Participation ran up to 63.4% just ahead of the pandemic and above 66% well before the great financial crisis.
There are two types of laborers who have disappeared -- second earners in two-earner households who have been forced into a care-giving role, and older workers who chose to retire prematurely out of pandemic-induced fear. Instead of using ratios that represent unsuccessful job seekers as a means toward illustrating the nation's ability to fully employ what we can visibly see as available labor, perhaps full employment needs to be interpreted through the prism of the economy's ability to reduce the 10.6 million-plus (November) job openings more than the almost 6.9 million (also November) individuals recognized as unemployed. Recognize the demand side as part of unemployment.
Visibility
My expectations are no different than what has become now a consensus view. The Federal Reserve Bank will wrap up its quantitative easing program by March. The FOMC would like not just to be flexible by, but to implement a first increase in the fed funds rate target by the March 16 policy statement, which it will be able to back up with a renewed dot plot and revised economic projections.
There is no February meeting and there is no April meeting. Simply put, this means that if the Fed does not commence with a rate liftoff in March, it will need to wait (unless it does something in between meetings, which has happened in my career) until May. So, understand that the Fed will do everything it can to kick-start the tightening cycle by March and set us up for it on Jan. 26 with the statement and press conference.
Bullard
The Fed's blackout period ahead of that Jan. 26 statement will commence on Jan. 15, which is a week from this Saturday. This also means that as artillery comes ahead of the infantry, Fed speakers who have been largely in hiding throughout the holiday season will be out in force later here on Friday and next week in order to soften us up. That is if there is a consolidated message, and there does seem to be, as Fed Governor Christopher Waller and Minneapolis Fed President Neel Kashkari have taken on more hawkish public postures of late.
One of my favorite Fed officials is St. Louis Fed President Jim Bullard, who I was not always fond of. He has grown on me, as I have come to respect him for both what appears to be his honesty in economic assessment as well as his ability to change his mind even if it brings public criticism. Oh, if only all leaders across all walks of life could allow changing environments to change stances taken publicly.
Bullard spoke on Thursday. He is a voting member of the FOMC in 2022. He was quite blunt. "The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation." Bullard clarified.. "It would make sense to get going sooner rather than later, so I think March would be a definite possibility, based on data that we have today." He then added "Then if inflation moderates as much as hoped by some forecasters, then we would be able to slow down or not raise as fast as we otherwise would in the second half of the year."
Finally, Bullard launched the grenade that put equity markets back into the red on Thursday, the same grenade that surprised markets in the minutes on Wednesday: "My own view is that we could go ahead with the balance sheet runoff shortly after lifting off the policy rate." Other Fed speakers will back this up next week, but I think what you see is what you get with this guy. We know what the central bank is going to try to do, and pretty much when they are going to try to do it. March for a rate hike? May for implementation of a quantitative tightening program? A lot of wood to cut between here and there. Environments change. That said, this sounds like the plan.
Equity Markets
After closing slightly to the downside, the S&P 500 comes into Friday with a three-day losing streak but still has found support at its 50-day simple moving average (SMA). The Nasdaq Composite also runs with a much deeper three-day losing streak and looks back on seven red daily candles in the past eight. The Nasdaq Composite closed on Thursday at a 3.4% discount to its 50-day SMA and a 2.8% premium to its 200-day SMA, which is even more important in terms of maintaining trend and in terms of keeping a number of portfolio managers invested. Trading volumes did dry up a bit on Thursday. Though it does not feel like it, that does express to me a lack of conviction in the selloff, at least for the moment. Do not confuse that with my conviction that we are probably in for a difficult to trade month, quarter, or even half.
On Thursday, small-caps outperformed larger-cap indices. As for large-caps, cyclicals still led the way, with the energy sector SPDR ETF (XLE) adding another 2.23% and the Financials (XLF) tacking on another 1.47%. Materials (XLB) were hit hardest, down 1.26% as traders finally took profits across the steel names. Healthcare (XLV) gave up 1.16%, which is a little misleading as the Dow Jones US Healthcare Providers index surrendered 4.23% on the Humana (HUM) beat-down. Humana gave up 19.37% after significantly reducing expectations for net Medicare membership going forward.
Winners did beat losers at the New York Stock Exchange as losers beat winners at the Nasdaq, neither by a very decisive margin. Advancing volume comprised 55.4% of NYSE composite and 48.9% of Nasdaq composite trading volume.
Treasury Markets
Treasuries continued to show weakness on Thursday, with the U.S. 10-Year Note yielding slightly less than 1.75% at the lows (in price terms). While the 10-Year continued in that direction...
... the belly of the curve continued to bow unnaturally. The Two-Year Note paid as much as 0.89% on Thursday, forcing further contraction upon that specific spread.
Perhaps more interesting is how quickly real rates are rising. Taking from the U.S. Treasury Department's website, the "Daily Treasury Par Real Yield Curve Rate" for the U.S. 10-Year Note increased to -0.73% on Thursday from -0,82% on Wednesday, from -0.91% on Tuesday, and from -0.97% on Monday. Using this table, the U.S. 30-Year Bond went out on Thursday just 15 basis points from going "Par Real Yield" positive. Psst... positive real yields are good and necessary in a healthy economy. They would be harmful in a less-than-healthy economy and would drain cash away from the equity space.
Uh Oh?
According to Freddie Mac, the average rate for a 30-year mortgage has reached 3.22%, up from 3.11% just a week ago and 2.65% a year ago. This is the highest average mortgage rate since May 2020. According to the Mortgage Bankers Association, Americans borrowed $1.61 trillion in 2021, which was a record, in order to chase a real estate market that ran away from them. This was up from $1.48 trillion in 2020. A turning point in 2022? Buyers hope so. Sellers hope not. This market probably does need to balance, at least for the short to medium term, and I say that as a homeowner.
Feeling Kind of Thirsty
Simply can't wait to try a boozed-up version of Fresca. Just kidding. By now, I am sure that most readers saw the news that Constellation Brands (STZ) and Coca-Cola (KO) had come to an agreement to introduce a line of spirits-based canned cocktails later this year under the Fresca brand name.
Innovative? More like a response. This month Anheuser Busch InBev (BUD) will introduce a line of hard sodas in cola, cherry cola, orange and lemon-lime flavors under the Bud Light brand name. If that's not enough, Pepsico (PEP) and Boston Beer (SAM) announced last year the coming, this year, of an alcoholic version of Mountain Dew. Rock and Roll.
Because You Asked
In response to a question from a reader who noticed that I had been bullish on SoFi Technology (SOFI) in the past but quiet on the name since, and that I had placed Wells Fargo (WFC) , Bank of America (BAC) and JPMorgan Chase (JPM) in my banking basket but not SOFI, the answer is yes.
Yes, I am still long some SOFI. No, I am not at all thrilled with the name, nor with the $50 million secondary offering launched in mid-November by a number of high-profile shareholders that netted the firm nothing. Like all fintechs and all de-Spacs, SOFI has come under pressure of late. I am not adding to this position on the way down. My average price is a little more than $17. Bear in mind that as I have written, sub-$20 stocks are exempt from my 8% rule.
Why I have not jettisoned this position as of yet is because I wait, with all the other shareholders, for approval of SoFi's planned acquisition of Golden Pacific Bancorp, which is a small bank, but would bring with it a national bank charter. If anything, a bank charter would immediately improve margin -- net interest margin to be exact -- as SOFI would then be able to use deposits to finance its own loans. As it now stands, SOFI must borrow money in order to lend money. Quite the model of inefficiency. Being an actual national bank will also simplify regulation tremendously as SOFI would then answer to a single entity and not need to respond to regulatory agencies in every state and territory where it does any business.
A bank charter will not solve every problem, but it would immediately simplify the business and improve profitability. In addition, the place is still run by Anthony Noto. Don't know the man personally. My opinion, though? Trustworthy. Smart. Competent.
December Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 404K, Last 210K.
Unemployment Rate: Expecting 4.1%, Last 4.2%.
Underemployment Rate: Last 7.4%.
Participation Rate: Expecting 61.9%, Last 61.8%.
Average Hourly Earnings: Expecting 4.1% y/y, Last 4.8% y/y.
Average Weekly Hours: Expecting 34.8, Last 34.8 hours.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 480.
08:30 - Consumer Spending (February): Last $16.9B.
The Fed (All Times Eastern)
10:00 - Speaker: San Francisco Fed Pres. Mary Daly.
12:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:30 - Speaker: Richmond Fed Pres. Tom Barkin.
