Interest Rates & Inflation
On Friday, we received the jobs data, which ended up being a quintessential example of how good news turned out to be bad news. The report showed 263,000 jobs added last month, which is good news. The unemployment rate dropped to 3.5%, which is also good news. The bad news was the participation rate which fell to 62.3%. How did the market take all the good news? Well, it quickly fell 2.8% on Friday. That tells us that the market is no longer pricing in a high chance of a soft landing. A soft landing is where the Fed raises rates to slow the economy, but the economy does not slow to a point where it hits a recession. You end up having a calm and reasonable slowdown in the economy and with inflation but no recession. We are seeing the market telling us that a soft landing is unlikely. Good news means that the Fed is going to have to get more aggressive with tightening, which will likely push the economy into a recession. We continue to see good news out of the labor market which caused the equity market to sell off. We’re kind of in a good news is bad news and bad news is good news reverse thing where everyone is watching the Fed again. This week, on Thursday, we will see the inflation data which is what everyone is waiting to see. The CPI report comes out, and expectations are for an 8% flip. Last month we got 8.3%, but it was higher than expected. We saw the market sell-off, and inflation came down, but not at the pace we expected. We really need to see the inflation number come down. Hopefully, we see a number below eight because that is really what the Fed is watching for. The Fed is fighting inflation and needs to get interest rates to a point where it is coming down. Hopefully, we don’t kill the job market in the meantime.
Earnings & Gas Prices
Hopefully, good news actually does mean good news as we kick off earning season later this week. We are expecting sales growth for the S&P 500 to be around 9-10% and earnings to be around 4%. A caveat is the energy sector, which is supposed to be the outstanding performer of this report. The good news is that means there will be lower expectations for the rest of the market. If we get some upside surprises and the banks kick off this week with interest rates up like they are, they might have a good quarter. That could be positive momentum for the market and could take some pressure off all the other headlines out there. OPEC was expected to cut 1 million barrels of production a day, however, they cut 2 million barrels of production a day. That’s good news for the energy sector but could be bad news for the consumer. We’ll have to see how the US responds and where gas prices end up after nearly two months of lower gas prices.
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