Recapping Last Week's Macro Events
Photo Credit: Mick Haupt, Unsplash
Weekly Market Recap for February 9th, 2024
The US Bureau of Labor Statistics (BLS) released January’s jobs report, which showed that 353,000 jobs were created in January. This figure is above the impressive December report of 333,000 and far exceeded the analyst’s forecast of 185,000. The unemployment rate is at 3.7%, which is another sign that the labor market remains competitive. The BLS report also showed that the average hourly wage rose 0.6% from December and 4.5% year over year.
The Fed continues to hold the federal rate at 5.25-5.50%. Wall Street appears to be shrugging off the likelihood that Jerome Powell will not cut short-term interest rates in one-quarter increments, as many as six times this year, beginning in March. The Fed is suggesting only three such cuts in the second half. The market's current pricing implies more than three cuts starting in May.
We are halfway through the 2023 fourth quarter of the 2023 earning season, and the results have been positive. Although profit growth is down 8% from the third quarter, it is still a second straight quarter of growth. We expect an annual 8-10% earnings growth for the S&P 500 for 2024.
Finally, the Standard & Poor’s 500 (S&P 500) closed above the 5,000 mark this week, a new milestone for the US market.
S&P 500 Index Approaches Key 5,000 Level
S&P 500 Technical Composite (Last 24 Months)
Bullish and Bearish Narratives
US Treasury Quarterly Refunding Announcement
The US Treasury increased its quarterly issuance of long-term debt for the third quarter in a row. However, given current borrowing needs, it suggests that no more increases are likely until next year. The auction sizes for the 2-year and 5-year notes will increase by $3bn per month, while the 3-year and 7-year notes will increase by $2bn and $1bn monthly, respectively. As a result, by the end of April, auction sizes for the 2Y, 3Y, 5Y, and 7Y notes will rise by $9bn, $6bn, $9bn, and $3bn per month, respectively. In addition, auction sizes for the 10-year note and 30-year bond will see increases of $2bn and $1bn, respectively. While the Treasury has recently relied on Treasury bills to meet its increased borrowing needs, it will now rely more on longer-duration bonds.
We will be watching to see how the market handles the increased auction sizes in the coming quarters. While the US Treasury does not expect to increase auction sizes, it will need to keep auction sizes at current levels, which are significantly higher than the last decade. Will Treasury yields rise and/or stocks trade lower? We would not be surprised to see the 10Y yield back above 4.50% before the end of 2024.
US Treasury Increases Note and Bond Issuance
How Treasury Flows Affect the Stock Market
When an investor buys a Treasury bill, the investment horizon tends to be shorter. The Treasury bill is compared to other cash alternatives. The source of funds to purchase the bills will likely come from excess cash or another cash proxy. The investment horizon is longer when an investor buys a Treasury note or bond. The bond is compared against stocks and other investments, which means the source of funds likely comes from other segments of the investment portfolio. More Treasury note and bond issuance means greater competition for the equity market, with the potential for higher yields to incentivize investors to buy the bonds. More bonds also mean more potential selling pressure in the equity market.
US Treasury Auction Sizes Increase to Fund Fiscal Spending
January FOMC Meeting
The market's rate cut hopes were high entering the meeting, with a forecast of nearly 1.50% of rate cuts in 2024 and a March start date. However, the Fed shocked the market by saying it wants more evidence that inflation will return to and stay near 2%. While Chairman Powell did not say what the central bank wants to see to gain confidence, he did say a March rate cut was unlikely. We previously discussed the market’s dovish rate cut forecast, warning that it could be disappointed by fewer rate cuts in 2024. Interest rate cuts are still coming this year, but the market’s forecast was too dovish. We believe 2024 will be similar to a 1994-1995 or late-2018 proactive rate cut. In this scenario, the cumulative amount of rate cuts would be closer to 0.75% or 1.00% rather than the bigger reactive rate cuts seen around recessions.
Number of Months Between Final Rate Hike and First Rate Cut
ISM Mfg & Services PMI Reports
The Institute for Supply Management (ISM) reports demonstrate why the Fed is hesitant to start cutting. The Mfg PMI rose to 49.1 in January from 47.1 in December. It marks the 15th consecutive month below 50, the longest stretch below 50 since August 2000 to January 2002. While the headline reading signals contraction, the New Orders Index moved into expansion territory at 52.5, 5.5 points higher than the reading of 47 in December. The Prices Index rose to 52.9, up 7.7 points from 45.2 in December. The Services PMI rose to 53.4 in January from 50.5 in December, marking the 13th consecutive month of expansion. The New Orders Index rose to 55 in January from 52.8 in December, and the Prices Index rose to 64 in January, a 7.3-point increase from December and an 11-month high. The two surveys suggest both the Mfg and Services industries are improving.
Manufacturing Industry Survey Hints at Reacceleration
Financial Conditions Do Not Appear Restrictive
The Fed put itself in this position in 4Q23 when it guided the market to the level of real interest rates and discussed how financial conditions would become more restrictive as inflation dropped. Naturally, the market interpreted the Fedspeak as indicating that rate cuts would start in early 2024. However, the Fed’s statement about real rates appears to have backfired, causing financial conditions to loosen. Nonfarm payrolls rose by +353,000 in January, with December and November revised upward by a total of +126,000. The unemployment rate held steady at 3.7%. In Q4 2023, U.S. GDP expanded at a +3.3% annual pace, a slowdown from Q3’s +4.9% but the second-strongest growth since Q4 2021. For 1Q24, the Atlanta Fed’s GDPNow model forecasts +3.4% GDP growth. Combined, the data suggests rates are not nearly restrictive enough, particularly after the recent drop in Treasury yields and easing financial conditions. The next big story in markets could be the Fed walking back the market’s rate cut forecast.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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