Nonfarm Payrolls & CPI January 2024

February 13, 2024

Mardi Gras came early this year for risk assets and… in Laborland! Let’s take it from the top. The US economy cranked out 353,000 new jobs in January. A surprise reading on December job openings (~9M) paved the way for a robust employment report from the Bureau of Labor Statistics. Hiring activity among private employers (317,000) surged to kick off 2024. Meanwhile, the official US unemployment rate held steady at 3.7%. This is the 24th consecutive month that the unemployment rate has held below 4.0%! Laissez les bons temps rouler (for now)! U6, however, ticked quietly higher to 7.2%. Wage pressures returned with hourly earnings increasing 0.6% compared to December. This brings the annual increase to a stunning 4.5%! Labor participation dipped slightly to 62.5% as the average American workweek declined to 34.1 hours. The knock on effects for inflation? That’s what we were curious about anyway, which brings us to today’s CPI report. The results? Well, slow progress is perhaps the best way to describe it. We would not be surprised to see a significant recalibration in yields (both nominal and real) in conjunction with a near-term lid on equities. More on that below.

A virtuous productivity cycle seems to be unfolding in the American economy. The most recent data indicate productivity jumped 3.2% at the end of ’23 (preliminary Q4 data). Meanwhile, Q1 GDP is running at a brisk 3.4% pace according to the Atlanta Fed. Let’s hope this dynamic has staying power! Artificial Intelligence has been a very hot topic over the last 12 months or so in the tech world and beyond. We believe that US corporations are in the very early stages of adopting AI (in its various forms) as a tool to accelerate efficiency. Anecdotally, I have lost count how many times “AI” has been referenced on various earnings calls over the past several months. Time will tell, but productivity in the workplace is something we are closely monitoring as this will have a major impact on global economic activity (GDP) and monetary policy. Speaking of monetary policy…

A few months ago we touched on regional banks and their particular exposure to commercial real estate. Well, the Fed’s hiking cycle appears to have claimed another victim in the group—this time New York Community Bank (NYCB). The root cause of the bank’s trouble wasn’t crypto exposure, which was the culprit dragging down regional lenders last year at roughly this time. Rather, it was exposure to another rate sensitive asset class—income producing properties (primarily office and multifamily assets located in NY). NYCB shocked financial markets at the end of January by ratcheting up its provision for losses (bad bets) and cutting its dividend (NEVER a good sign). Dividends are important to stock investors, folks; they are a sign of financial stability (in a rather unstable world). Cutting a dividend creates a confidence crisis among shareholders and that crisis can engulf otherwise healthy peers (contagion). The opposite, of course, can be true when a company decides to initiate a dividend. Take Meta Platforms (formerly Facebook) for example. META announced a dividend during its afterhours earnings call, which was just a couple of days after the NYCB debacle. Meta shares climbed to an all- time high, NYCB was effectively halved over the same time period—a tale of two dividends! We would also mention here that this “cautionary tale” is why many growth companies opt for stock buybacks in lieu of dividends — more flexibility, less drama! There is a lot of value in that these days.

Earnings season has been quite strong despite the relative economic softening that we encountered domestically in Q4. Corporate results have been resilient — and in some cases brilliant! We are now tracking for operating earnings to approach $250/ share, which brings our S&P 500 target to 5100 from 5050 (all things considered). If the economic data keep coming in the way that they have over the last two or three months, Jay Powell will have pulled off an extremely rare and almost unheard of outcome: a “no landing” scenario. This effectively means that the Fed raised rates in a manner sufficient to subdue inflation but not enough to significantly slow/ derail the domestic economy. Now, the truth is that the US did encounter a short-lived “technical recession” in 2022—two consecutive quarters of declining growth as measured by GDP is the definition after all, BUT the NBER (National Bureau of Economic Research) stayed mum. In fact, NBER shows the last US recession concluded in April 2020! Regardless, the general debate among investors has generally been how hard or soft the landing would be for the US, but what if this isn’t really a landing scenario at all? The jury is still out but the risks and opportunity sets could be quite unique. Where would that put us in the cycle? Remember how we talked about investors coming to grips with an inverted yield curve in the US as “normal” (i.e. inverted for longer). More to come on all of the above in the coming months.                     

News Release: Bureau of Labor Statistics (The Employment Situation- January 2024)

Originally posted on Total Wealth Partners.