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DID JOBS WAGES GET THE MESSAGE

The market was disappointed when Jerome Powell indicated that a March Fed Funds rate reduction was not in the cards. This morning we had data releases on US payrolls and wages. The payroll data reported that employment increased by 353,000 jobs in January, and this exceeded estimates, while the unemployment rate held steady at 3.7%1. The second key data point was the increase in hourly earnings by 0.6%. These two data releases largely cement a Fed on hold. As I have written in past CIO Corner posts, strong employment and wages will work against a Fed-cutting cycle. As our economy is so heavily focused on consumer spending, increased payrolls and employment will feed further into the inflation pressures in the economy. I noted a few weeks ago that the “last mile” of inflation was going to be the hardest mile to complete. These releases only feed inflation pressure and this will put all eyes on the releases of CPI and PCE over the coming weeks.

As I write this on the morning of February 2nd, the yield on the 10-year Treasury note has increased over 12 basis points and stocks are mixed1. The S&P is up about 0.3%, the Nasdaq has increased nearly 0.9%, and the Dow is down 0.3%.

Returning to the inflation outlook for the moment, I am looking at annual wage growth still running at 4.5%, which is above inflation1. If real wages are growing, it is thought that this could accelerate consumer spending. The market’s great wish is for a soft landing, but if wage growth feeds inflation, the Fed may be put in a position to continue tightening monetary policy in order to combat inflation. Our operating thought remains that the Fed will risk employment and a recession in order to contain inflation. Today’s releases put more pressure on the Fed and provided even more gravity to the upcoming inflation data releases. I am not sure how we get to a soft landing amid higher wages and a tight labor market.

We are about 11 months removed from the mini regional banking crisis that occurred last March with the fall of Silicon Valley Bank and pressure being felt through the regional banking sector. More recently, New York Community Bancorp has been under pressure with the stock down about 40%. Having bought a portion of Signature Bank’s assets when that bank failed, and given fresh concerns over that loan and asset quality, New York Community Bancorp cut their dividend. Many analysts are saying this is isolated and not systemic. That said, with commercial real estate still under pressure, we think we will see episodic issues pop up in the regional bank arena. This bank has insured deposits more in line with their peers while Silicon Valley Bank had a preponderance of uninsured deposits. We are of the opinion that this is not about to set off another round of regional bank failures, but we also think it is wise to keep a close eye on this sector. Stay tuned.

1 Source: Bloomberg

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