2/03/23 – So Where Do We Go From Here?

We thought the lead story for this week was going to be the less hawkish, post-FOMC press conference, but in fact it’s the January employment report.  Economists had been forecasting that the economy would add 188,000 jobs in January and the unemployment rate would tick up to 3.6%.  Given the increasing number of layoff announcements since December, we thought the actual release would have been about half of the expectation.  Instead, the economy generated a staggering 517,000 new jobs during the month and the unemployment rate ticked down to 3.4%.  There was no weakness in any of the subcomponents and, to be honest, the report was bewildering.

Our take on the Fed’ post-meeting press conference was that Chairman Powell believed the committee was close to a peak in rates needed to achieve a soft landing, and that after Wednesday’s move, the Fed would only move in two more increments of 25 basis points each.  The Chairman was asked about the debt ceiling twice and both times he answered in a disgusted tone that it was Congresses job, not that of  the Federal Reserve.  We’ve long held the suspicion that the Federal Reserve is privy to economic data prior to its release.  What’s clear is that the Fed didn’t have the employment report at the Wednesday press conference or they would have most likely stuck with the 50 basis points they did at the December meeting.

So where do we go from here?  Fed Fund futures are higher across the curve but top out at 5.00% in July and are forecasting a rate cut by the end of this year.  Unless today’s report was a fluke and gets revised much lower next month, we think that expectation is too low and the terminal rate is likely to be 5.25% to 5.50%; and certainly no rate cut this year.  San Francisco Fed President said as much at her press conference today.

The economic calendar for next week is a light one with the University of Michigan survey’s being the only significant release.