Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.
Week in Review
January 24– 30
Last week, the BLS released its estimate of wage growth for the fourth quarter of 2021, and the results were pretty much in line with expectations: at the national level, wages and salaries grew by 4.5% year-over year. That’s an impressive (but also disturbingly high) rate of growth and the fastest since the BLS began collecting data almost 20 years ago. But it’s still not enough to cover the 7% bite that inflation is currently taking out of your paycheck.
The good news, though, might be that at least some segments of society are keeping up with inflation: service workers saw wages and salaries grow by 7.1% while leisure hospitality workers – ground zero for pandemic-related labor market trouble – earned an increase of 8.0%. That might be the silver lining inside the wage and inflation data that we’ve all been looking so hard to find.
Isn’t inflation the boogeyman we’re all supposed to fear more than a Russian invasion or a dull Super Bowl and lackluster halftime show? Well, yeah, but here’s why it could be good news – at least for a little while. Make no mistake, inflation is with us and it needs taming. And the Fed is on the job (see below), but it’s probably going to take a little while for price pressures to relent, no matter what the Fed does (or doesn’t) do. But in the meantime, there are some areas of the economy where wages and salaries probably need to rise in order to keep people working and engaged in the productive economy. For evidence, look no further than the labor force participation rate, which currently sits at a still-depressed 61.9%. That feels much more consistent with recession than recovery, and it’s one area of the job market where the Fed is paying particularly close attention.
So wage growth that’s running just a little bit ahead of inflation in a few select areas is not necessarily reason to panic, as long as it remains limited in scope and is allowing other areas of the post-pandemic economy – such as an anemic labor force participation rate – to heal even just a little bit faster.
But that’s a very fine line for an economy to walk. Wage growth is notoriously “sticky”: when wages rise they rarely fall back again, and if wages accelerate too much, employers are forced to charge higher and higher prices for the stuff they sell. That creates more pressure on wages from all of us who are forced to buy their now-more-expensive stuff, which in turn creates more pressure on prices, and so on (and so on…). That sort of self-reinforcement of two complementary trends is not uncommon in modern economics and in this case is termed a “wage-price spiral.” If allowed to rage un-checked, this scary chain reaction can create all sorts of problems, ranging from stagflation to hyper-inflation and social instability. (It has very little impact on the watchability of the Super Bowl, however…)
To be clear, markets aren’t yet convinced that a wage-price spiral has developed. But consumers, and the people who are paid to analyze how they’re feeling, are a little more freaked-out about it. Consider this line from last week’s University of Michigan consumer sentiment survey: “…while supply chains and essential workers sparked the initial increases in prices and wages, a wage-price spiral that has subsequently developed is no longer tied to those precipitating conditions.” Translation: in the eyes of the good folks at the UofM, we’ve already moved past the point where inflation is merely a function of pandemic-related disconnects like shortages of toilet paper and computer chips or COVID-enabled couch-surfing. Instead, we’ve now entered a self-reinforcing cycle of higher wages and higher prices that is at least one step removed from those initial causes.
It’s hard to imagine a more unsettling comment on inflation and consumers’ collective reaction to it, especially one that’s coming from perhaps the country’s leading authorities on consumer attitudes and spending. (And for what it’s worth, the survey-takers at the UofM added another et cetera to their comments, saying that consumer spending has recently been supported by rising home- and stock prices, which are “likely to turn negative in the year ahead.”) Wow, thanks Professor Buzzkill. My guess is you won’t be getting too many invites to campus parties this year.
To summarize: markets aren’t yet fully convinced that inflation has entered the aggressively malignant phase of its life cycle, but consumers – at least as far as the UofM is concerned – are certainly thinking long and hard about it. But what about the Fed? After all, no matter what investors, or consumers, or academics believe about inflation, the one person on the planet whose opinion matters most is Jerome Powell, Chairman of the Federal Reserve. If Powell is worried, then we all should be worried – not necessarily because Powell and his pals have a better view of what’s really going on in the economy (which of course they do,) but more because of what they can do about it. They’ve already started draining the liquidity punchbowl because inflation has proven to be deeper and more durable than they originally believed, but if they start to panic, the Fed might not only pull the punchbowl away, they might also smash it on the floor and mop up the dregs with a giant anti-liquidity mop.
The good news is that despite all its recent pivoting, the Fed doesn’t really seem all that concerned. As was (mostly) expected, last week’s FOMC meeting came and went without an increase in rates or an acceleration of the taper. But it’s a clear sign of exactly how uncertain everyone is about their own views of inflation that the initial relief rally in stock prices that accompanied the Fed’s no-lift-off announcement last Wednesday evaporated almost immediately after the Chairman’s press conference began later that afternoon. That reversal came in spite of the fact that Powell seemed to go out of his way to avoid sounding too hawkish or pessimistic, reiterating earlier comments that the economy and labor markets are in much better shape this time than they were in 2015, the last time the Fed began removing extraordinary accommodation. Powell even added that asset prices, while somewhat elevated, are at least partially supported by the fact that consumers, businesses and the banking system are all healthy, liquid and highly capitalized.
But it’s probably still no exaggeration to say that the economic environment is more unsettled today than it has been at any point since the first pandemic-related shutdowns began in March 2020. Ironically, things felt a lot less unsettled during the depths of the COVID crisis than they do now, when it seems very much like COVID is on the verge of becoming endemic and therefore mostly benign. But Wednesday’s big reversal in stocks shows exactly how sensitive markets are right now to any change in the environment: aside from a few “givens” like rising rates, caustic inflation, shaky politics and a less-accommodative Fed, markets don’t seem to be all that sure where we go from here. And that’s obviously showing up in how volatile things feel right now.
Whew, okay. That’s a lot of heavy stuff for one week. Let’s do a quick round-up of other things that captured capital markets’ attention last week. Thankfully for you, patient reader, there isn’t a ton of stuff to cover, and most of it wasn’t all that impactful or surprising. Here’s a short list: earnings season continued to be mostly uninspiring and somewhat ambiguous, with little to expound upon other than Apple’s big blow-out on Thursday, where the firm mostly implied that the chip shortage may not have been so bad after all. Housing data continued to suggest a plateau, with previously white-hot growth increasingly cooled by rising mortgage rates, still nutty price growth and chronic under-supply. Meanwhile, the various forms of PMI-type data that we got last week continued to warn that the fastest growth of the cycle might be behind us (including a surprisingly weak “flash PMI” that showed the US economy was just one tackle-for-loss away from the contraction side of the 50-yard line.)
So that’s where we’re at: inflation is rampant, but the Fed is on the case. The policy environment is tightening, but not aggressively so (at least not yet.) The economy is growing, but growth may also be topping out. The virus is active, but we seem to be learning to live with it. Corporate earnings are fine, but not exactly inspiring. I could go on, but that seems like enough “yeah, but’s…” to mostly explain why things still feel so, uh, unsettled for those of us who watch markets on a day-to-day basis. For what it’s worth, I think that’s just how things are gonna be for a while. So unless and until that changes, it’s probably best to stay calm and keep the faith.
What to Watch This Week
January 31– February 5
|Notable economic events (January 31-February 4)
Monday: Dallas Fed, Chicago PMI
Tuesday: ISM/PMI manufacturing, JOLTS; earnings: GOOG, UPS, MSTR, BABA, AMD, XOM, GM
Wednesday: ADP payrolls; earnings: FB, CHRW
Thursday: ISM/PMI services, weekly unemployment claims, Challenger job cuts; earnings: AMZN, F,
The strong backbeat of Ukraine/Russia tensions and other geopolitical happenings notwithstanding, this week’s main event will be payrolls (Friday), and all of the warm-ups that occur beforehand (ADP on Wednesday and Challenger job cuts on Thursday.) Add to those reports Thursday’s weekly initial claims data and Tuesday’s JOLTS figure, and we should have a better idea whether or not Chairman Powell was telling us the truth last week when he boasted that the job market is “very, very strong” and that the Fed can move forward with normalization without “damaging it.”
Earnings season will continue to gain momentum this week, with the rest of the FAANGs scheduled to release results this week. Alphabet/Google reports on Tuesday, followed by Meta/Facebook on Wednesday and Amazon on Thursday. To be completely honest, it just isn’t quite the same this time around, with the FAANGs bearing so much of the burden of all the recent selling. That said, these stocks still collectively represent the center of the large-cap universe and have so much gravity inside the media-favored indexes that they still matter, regardless of how much ground they may gave given up so far this year. For the sake of those indexes alone, let’s hope that Apple’s eye-popping results from last week are a preview of what to expect from GOOG, AMZN and FB this week.
But frankly, we’ve entered the part of earnings season where there is just so much to talk about that it’s impossible to capture all of it (for example roughly 200 companies are scheduled to report on Thursday alone.) That said, here are a few potential highlights beyond the remaining FAANGs that might make headlines: automakers (GM on Tuesday and Ford on Thursday,) could have something to say about whether the chip shortage has relented at all, while AMD (Tuesday) might have an even better perspective on the semiconductor food chain. From a logistics point-of-view, look toward UPS on Tuesday or trucker CH Robinson (Wednesday) for confirmation of FedEx’s guarded optimism a few weeks ago and the somewhat ambiguous reports from the rails so far this season. For a view into China and how its on-again/off-again economic recovery and renewed experiment with heavy-handed regulation is going, Tuesday’s earnings results from massive tech-and- ecommerce platform Ali Baba could provide insight. But as always, any one of the hundreds of companies reporting this week might have something important to say when they take the stage.
Finally, markets will get a healthy dose of PMI-related data beginning on Tuesday when both Markit Economics and the Institute of Supply management release their respective views of the nation’s manufacturing industries. That will be followed on Thursday by a similar look into how service-producing firms are holding up amid omicron’s continued surge to provide a fairly comprehensive view of what might lie ahead for the US (and global) economies. Those reports will be augmented by the last few regional Fed manufacturing reports, including the Dallas Fed’s survey on Monday. Again, the focus here will be on whether growth is tipping over after the US economy rocketed through the fourth quarter with surprisingly strong (but perhaps unsustainable?) growth of 6.9% when those figures were reported last week.
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 Bureau of Labor Statistics, FRED St. Louis Federal Reserve
 Federal Reserve press conference, 1/26/22, via YouTube.
 Bloomberg, seekingalpha.com, company reports.
 See https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA-HPI-Monthly_01252022.pdf, https://www.spglobal.com/spdji/en/index-family/indicators/sp-corelogic-case-shiller/sp-corelogic-case-shiller-composite/#overview, and https://www.mba.org/2022-press-releases/january/mortgage-applications-decrease-in-latest-mba-weekly-survey, among others