A month ago, the primary focus of market players was "peak inflation." The hope was that when the Consumer Price Index (CPI) peaked and started to trend down, the Fed would start to pivot and that would bring an end to the bear market.
That sounds logical, but we are grappling with a far more complex economic situation, and it is going to go through phases and will evolve over time before this nasty bear market comes to an end.
While CPI and many inflation concerns have eased and are falling, there is still tremendous concern about labor-related inflation. There is still strong demand for employees and that is causing wage inflation to stay elevated. Fed Chairman Jerome Powell has made it clear that this is the Fed's major concern right now.
Jobs data on Thursday came in hotter than expected, which caused the odds of a rate hike of 50 basis points at the next Fed meeting to rise to 57%, but stocks managed to hold on to key support levels.
Here on Friday morning nonfarm payrolls will be announced at 8.30 am ET. While there has been moderation in hiring and estimates are for a decline in job growth to 202,000 jobs in December, down from 263,000 in November, there is a whisper number of 244,000 after the strong ADP report on Thursday.
This report will be a market mover primarily because it will impact what the Fed does at its next meeting on Feb. 1. Fed members keep making comments that they are not going to back off on their fight against inflation prematurely.
The battle against inflation is going through phases, but so is the entire bear market cycle. Once the Fed believes it has inflation under control, then the market will need to deal with the economy slowing and the recession that the hawkish Fed policies will create.
This morning J.P. Morgan ade this comment: "We believe the market is approaching a bifurcation, at which point stocks risk seeing a more accelerated leg of the bear market that is associated with falling earnings expectations and break in correlation from interest rates. We ultimately expect a 1H23 bear market bottom. The realized inflation trajectory into early 2023 and the nature in which the forward rate curve reshapes to it will likely dictate the timing and level of the low. At the positive end of the risk spectrum... rapidly falling inflation data leads to further expectations of eases in the second half of the year and helps the S&P 500 bottom near the 3491 Oct trough."
This seems to reflect a building consensus that the market may hit a trough in the first half of 2023 as stocks are hit by the realization of slowing growth and a recession. The view is that this has not yet been anticipated or discounted to a great degree.
Before we confront the issue of slowing growth, we need to deal with inflation first, and the jobs news today will provide clues as to whether labor-related inflation is slowing.
Technical conditions are precarious, and the risk is to the downside.
