Stuck with policy uncertainty

Fed Chair Powell gave market participants plenty to think about on the other side of his press conference. That may just be a near-term solution and an intermediate problem.

He solved the market’s angst about the specter of another rate hike, saying that he thinks it is unlikely that the next policy rate move will be a hike. Markets liked hearing that. On the other hand, he didn’t do anything to solve the market’s frustration about when the Fed might actually cut rates and by how much. Markets didn’t exactly love that sense of uncertainty.

The latter point notwithstanding, the stock market might be fine living with that uncertainty so long as the economic data and earnings results cooperate with its soft landing view. So far, so good for the most part there as neither the economy nor earnings have cracked in the wake of 11 rate hikes by the Fed.

Granted there have been some perturbations this reporting period about the state of the U.S. consumer, but on balance, the consumer’s resilience has shown up in the spending data.

That resilience has been a byproduct of a solid labor market, the evidence of which is on display again this morning.

Initial jobless claims for the week ending April 27 were unchanged at 208,000 (Briefing.com consensus 213,000). Continuing jobless claims for the week ending April 20 were also unchanged at 1.774 million.

With no change in initial jobless claims, the key takeaway also remains unchanged from last week: employers, in general, are reluctant to cut jobs, which will be interpreted to mean that they remain generally optimistic about demand. That’s not a bad thing, unless one is hoping for a rate cut.

The Q1 Productivity report isn’t going to move the needle on rate cut hopes. Nonfarm business sector labor productivity was a lowly 0.3% in the first quarter (Briefing.com consensus 0.8%) following an upwardly revised 3.5% (from 3.2%) in the fourth quarter. Unit labor costs, meanwhile, surged 4.7% in the first quarter following a downwardly revised 0.0% reading (from 0.4%) in the fourth quarter.

The key takeaway from the report is that unit labor cost number, stemming in part from a 5.0% increase in hourly compensation, which is still too far detached from an inflation-friendly reading insomuch as the Fed is concerned.

Separately, the March Trade Balance Report showed little change in the trade deficit, which improved by $0.1 billion to $69.4 billion (Briefing.com consensus -$69.0 billion) from a downwardly revised $69.5 billion (from -$68.9 billion) in February.

The key takeaway from the report was that exports (-$5.3 billion) and imports (-$5.4 billion) both decreased month-over-month, signaling some softness in global trade activity in March.

This batch of data invited some knee-jerk trading activity in the Treasury market, but yields across the curve have remained subdued, anchored in the very near term perhaps by a rollback of rate-hike worries.

The 2-yr note yield is down one basis point at 4.93% and the 10-yr note yield is up two basis points to 4.62%. The relatively calm demeanor there has kept the stock market in relatively good spirits following yesterday’s post-FOMC volatility.

Currently, the S&P 500 futures are up 33 points and are trading 0.7% above fair value, the Nasdaq 100 futures are up 138 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 203 points and are trading 0.6% above fair value.

Nice leadership from Qualcomm (QCOM), which is up 6.3% after its earnings report, and relative strength in the mega-cap stocks this morning, have underpinned the equity futures market. Apple (AAPL), which will report its quarterly results after today’s close, is among the mega-cap leaders, up 1.6% in pre-market action.

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Originally Posted May 2, 2024 – Stuck with policy uncertainty