Macro Commentary

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Nvidia Earnings Highlights AI’s Broader Impact

Jacob Hess
May 23, 2024

Nvidia's record-breaking Q1 2024 results, driven by the AI revolution, have propelled the stock market higher, overshadowing concerns about restrictive monetary policy. The company's performance and the widespread adoption of AI across industries raise questions about the US economy's resilience and the true restrictiveness of current financial conditions.

  • NVDA is set to boost stocks higher today, up around 7.5% in pre-market following a blowout earnings report. S&P 500 futures are up 0.58%, NASDAQ futures up 1.00% while Dow futures lag at 0.09%. Bullish trading is likely to be confined to segments of the market that are directly or indirectly impacted by Nvidia.
  • US Treasury yields are mostly unchanged this morning following the release of the FOMC's April Minutes. The details of the Minutes felt hawkish with members sharing that they were uncertain on the inflation progress. However, that didn't elicit much of a reaction from bond investors as Fed speakers since then have represented that hawkish sentiment since the meeting.
  • Asian markets were mixed with Japan's Nikkei 225 up 1.26% and the Taiwan 50 up 0.92% while China's Shanghai Composite fell -1.33%, the Hang Seng index fell -1.70%, and Australia's ASX 200 saw a smaller -0.46% decline.
  • A strong Nvidia is a real problem for Chinese semiconductor firms. Broadly, they traded lower by -1.6% today while NVDA is set to rocket. So far this year, Chinese semis are down -18.3%.
  • European markets were broadly higher with France's CAC 40 up 0.38%, Germany's DAX 40 up 0.34%, and Italy's MIB index up 0.32%. The UK FTSE 100 was the exception as it was mostly unchanged today. No major rate moves except for Italy's 10-yr yield up around 3 bps, and the UK's 10-yr yield down around -2 bps.
  • The general Bloomberg Commodity Index is down again today, down about -0.14%.
  • Brent crude oil is up today, reversing some of the downward momentum that has developed since the 2024 peak in April. Yesterday's EIA report of crude oil stocks showed an increase of 1.83 mil (vs -2.55 mil expected) which confirmed the surprise build in the API numbers.
  • Metals prices extended their declines with gold down -1.05%, silver down -1.8%, aluminum down -1.4%, and copper down to a lesser extent of around -0.2%.
  • US-China trade tensions are escalating as US Treasury Secretary Yellen continues with a hardline stance against China. In recent remarks, the Secretary noted that G7 finance ministers plan to discuss China's industrial overcapacity and potential responses, emphasizing that China's industrial policies and overinvestment face significant global opposition. Adding fuel to the fire, the US Trade Representative has released a new list of import tax hikes on Chinese goods. China has also up the ante with Taiwan. Today, China has intensified military activities around Taiwan, launching "punishment" drills in response to what it terms "separatist acts," as reported by Reuters.
  • Global PMI readings converged on low growth in May with the exception of India still growing at a robust rate. In the UK and Australia, the pace of growth slowed slightly but the expansion was maintained. In Europe, German PMI numbers beat expectations and pushed the Eurozone Composite PMI data to a 15-month high. Notably, Eurozone business confidence was at a 27-month high, and expansions in business activity and employment both accelerated. Input costs were “up sharply again” and entirely in the services sector. Manufacturing input costs saw a slight decline. Output price inflation continued to soften and was the weakest since November 2023.
  • Euro area negotiated wage growth was up 4.7% YoY in Q1 2024, up from 4.5% YoY in Q4 2023. This is faster than the 4.5% pace reported for the full year last year. The ECB noted that “inflation catch-up” is a “central motive” in recent wage negotiations. The forward looking wage tracker suggests that wage growth should be about 4.1% in 2024 according to data collected by the April ECB meeting, down from 4.7% which was estimated using data through the December ECB meeting. The ECB concludes: “Overall, negotiated wage growth is expected to remain elevated in 2024, which is in line with the persistence that has been factored into Eurosystem staff forecasts and reflects the multi-year adjustment process for wages. However, wage pressures look set to decelerate in 2024.”
  • Early US macro data noted slowing activity but a solid labor market. The Chicago Fed National Activity Index fell -0.19 pts to -0.23 in April, down from the downwardly revised March value of -0.04 (prev 0.15). All categories of indicators made slight negative contributions which supports the narrative of a broad, gradual slowdown in growth in the US. Also this morning, jobless claims fell -8k to 215k according to last week's data. The insured unemployment rate was unchanged at 1.2%, and continued claims grew 8k to 1.79 million. So far, unemployment insurance data has not confirmed an upward trend that was sparked by the surprise uptick seen at the beginning of May.

Nvidia week continued with a bang after the AI computing company reported recover revenue in Q1 2024 and beat expectations in every tracked metric. Stocks responded favorably to the news, and the major indexes (which are heavily reliant on NVDA moves) were in the green to start the day, and that narrative will likely continue to drive trading during the session. AI continues to be the primary theme behind bullishness and has enabled investors to shrug off concerns of restrictive monetary policy and its effects on stocks.

Let's take a quick look at Nvidia's numbers. Revenue increased 18% QoQ and 262% YoY to a record of $26.0 billion as revenue from its data center segment surged 427% YoY. CEO Jensen Huang confirmed that the explosive growth is a result of the rush to train and improve generative AI models, what he calls “the next industrial revolution.” Operating income were up 690% YoY and EPS increased $0.82 to $5.98. Nvidia sees revenue in Q2 2024 rising another $2 billion to $28 billion as demand remains robust.

These Nvidia results actually say lot about the US economy and its resilience over the last few quarters. The AI phenomenon and investment in those technologies are not contained to just a few sectors, but instead, are being observed across a wide variety of industries. Not only are the biggest AI players, Amazon, Google, Microsoft, spending oceans of money in AI, but also major retailers, healthcare companies, and industrials are spending to try and improve efficiency with generative AI. All of this is taking place in the face of multi-decade high borrowing costs which are typically burdens for CapEx on new technology projects which have questionable ROI. That means either two things: 1) generative AI and the new technologies around it are the answer to problems of low productivity and the ROI is high or almost certain, or 2) financial conditions are not actually that restrictive at all, and US businesses and the economy are able to expand in the current rate environment.

For the Fed, the first scenario is deflationary as productivity gains will drive unit labor costs lower over the next few years as these AI projects are realized. The second scenario is inflationary and may even be a signal that the Fed could suspect that the long-term equilibrium rate has increased. Additionally, it would add fuel to the “higher for longer” narrative that is the main bearish force in the market today. With financial conditions at the easiest level since December 2021 (based on the Chicago Fed National Financial Conditions Index), I lean more towards the second narrative. Unfortunately for the bulls, Nvidia week only happens four times a year while macro data and the Fed are consistently pointing to the need for higher policy rates for longer.

Hot UK Inflation Data Spoils Nvidia Earnings Day

Jacob Hess
May 22, 2024

The general sentiment in the market today is pointing to a balance between strong corporate earnings expectations and the rising likelihood of "higher for longer" interest rates. Futures are exhibiting a mixed tone with the S&P down -0.14%, NASDAQ slightly up by +0.03%, and the Dow down -0.18%. Treasury rates are up by approximately 3 basis points, with the 10-year settling around 4.45%. This movement is likely influenced by recent UK CPI data.

Mixed performances in Asian markets with Taiwan leading (+1.94%), China nearly flat (+0.02%), Australia down slightly (-0.05%), while Japan's Nikkei 225 saw a dip of -0.85% following weak trade data due to a weaker yen. Japanese Government Bond yields rose by 1 basis point.

European markets are in the red following hot UK inflation data, with UK's Footsie down -0.65%, France -0.63%, Germany -0.23%, and Italy -0.22%. The STOXX 600 index dropped around -0.34%, and yields on European bonds increased by roughly 3-4 basis points.

Brent crude oil has experienced three consecutive losing days, with a -1.1% drop today due to bearish supply and demand news. Specifically, U.S. crude oil stockpiles increased by 2.48 million barrels against the expectation of a decrease. The anticipation of sustained restrictive monetary policy has put downward pressure on metal prices. Gold decreased by -0.56% and silver by -0.45%. Notably, copper and aluminum experienced sharp declines of -3.77% and -1.46% respectively, following recent bullish runs.

In macro news, the UK's CPI increased by 0.3% MoM and 2.3% YoY in April, higher than expectations. Core CPI also rose by 0.9% MoM and 3.9% YoY. Disinflation trends continue but are milder than expected, mainly driven by services inflation, which remains high.

Japan's trade balance fell to ¥-462.5 billion in April, missing the expected ¥-339.5 billion. Exports were up 8.3% YoY, while imports surged by 8.3% MoM due to a weaker yen.

In the US, the MBA Mortgage Applications Composite Index grew 1.9% WoW last week with the Purchase Index down -1.2% WoW and the Refinance Index up 7.4% WoW. The Refinance Index is at a 1.5 year high.

Bulls trading on the rate cut narrative are probably feeling a bit overextended at the moment. While the week started with excitement for Nvidia earnings (which are set to come out today), that quickly fizzled out to rise of the “higher for longer” that has been bolstered by various macro data points and central bank rhetoric. In fact, this week's market dynamics have accentuated the competing “strong corporate earnings” and “need for restrictive policy” narratives and how that is playing out in markets.

Today wasn't the craziest macro day, but there was a slew of data out of the UK that laser focused on inflation which had the market listening. CPI inflation in the UK came in at 2.3% YoY in April which was a solid deceleration from the 3.2% YoY in March, but this was still above expectations of 2.1% YoY. The annual rate in April benefitted from base effects as a year ago the monthly rate was clocked at a hot 1.2% MoM, and when comparing that to the 0.3% MoM increase last month, there is a clear decelerating trend in inflation. Where does the heat come from? Services inflation. At 1.5% MoM, the increase in services prices was basically the same as the monthly rate in April 2023 and was heavily impacted by recreation segments that are very sensitive to wage growth (which is still trending north of 6%).

In response to the hot CPI print, UK equities traded lower and the 10-year yield was up as much as 10 bps. These moves bled over into other European markets where stocks fell and 10-year yields (but only by about 3 to 4 bps). And that bearish sentiment also flowed into US markets where futures were slightly lower early and yields were on the rise, crashing the Nvidia party. It's worth noting that there hasn't been any major US macro data point so far this week, so the impact of UK inflation is unusually high. Some minor data came out at 10 am: existing home sales slightly lower than expected in April and business inflation expectations unchanged at 2.3% in May.

Commodities appeared to be the most sensitive to data supporting restrictive monetary policy in developed economies. Crude oil and metals were both lower while agricultural commodities are mostly flat. Copper futures, which have recently shot above $5 per pound, are down almost -5% on the day to about $4.85 per pound. The aggregate Bloomberg Commodity Index sums it up well, down about -1.1% so far today, cooling off its strong YTD performance. These reactions in commodities are slightly a result of overbought conditions in certain subsegments of the market like metals, but in others, its a clear signal that rate cut expectations are starting to getting rebuffed.

Global Bull Runs Pause

Jacob Hess
May 21, 2024

Global financial markets are showing signs of fatigue as recent bull runs in equities lose momentum amidst mixed economic data that is complicating the path forward for central banks.

In the U.S., stocks are hovering near record highs but trading volumes have declined in recent days, suggesting the rally may be running out of steam. Treasury yields have also pulled back after rising for three straight days.

European markets in the red today after a positive day yesterday: UK -0.38%, Germany -0.51%, Italy -0.83%, France -1.03%. The biggest news was a strong Q1 2024 labor cost growth print of 4.9% YoY vs 3.4% YoY in Q4 2023 which is a huge pushback against rate cutting narratives.

European yields did not really reflect the wage growth acceleration as other weak data in the UK and Germany seemed to supersede it. On top of that, the ECB has been very strongly indicating a rate cut in June so there may not be data that can push ECB members off that position. UK 10-year yield down -1 bps, German 10-year yield roughly unchanged, Italy 10-year yield up 5 bps, France 10-year yield down -1 bps.

Yesterday, Asian markets were all green, today, all red: China -0.42%, Japan -0.31%, Australia: -0.15%. Hang Seng index reversed its recent gains, down -2.12%. Australia's RBA set a bit of a hawkish tone in its May Minutes when it considered raising rates in response to better-than-expected data.

Australia's central bank struck a hawkish tone, considering a rate hike in response to better-than-expected data. But consumer sentiment remains subdued with cost of living pressures weighing on households.

In the commodities complex, crude oil prices retreated on the "higher rates for longer" theme that could crimp demand. However, copper and aluminum extended gains to new highs, likely driven by long-term supply-demand imbalances.

Global markets are pausing their bull runs today with a sea of red prints in Asia and Europe and now the US. While the start of the trading week opened with eyes on Nvidia earnings and the previous strong corporate earnings reports in the last few months, this morning was a bit more somber as there was some data that pushed back against the global rate cut narrative.

  • To start, the Reserve Bank of Australia's May Minutes release reminded investors that better-than-expected economic data is a reason for central banks to stay on the sidelines instead of easing financial conditions. RBA members actually considered a rate hike in the Minutes but ended on keeping policy rates unchanged. They agreed that “fine-tuning” policy to short-term variation in data was not ideal which means that if anything, they will opt for not changing rates at all in 2024.
  • In Europe, the flash labor cost index print was the number that spooked investors, coming in at 4.9% YoY in Q1 2024, well-above the 3.4% YoY growth in Q4 2023. Strong wage data has been something that the ECB has been watching in its data-dependence stance, and it could be a data point that ECB members respond to if moving against the disinflation trend. However, guidance for a June rate cut has been so strong, it seems unlikely that it won't happen. As a result, European yields did not react much.

Despite these two releases putting a bit of a dampener on doves, there were other data points that were friendlier. UK manufacturing data from CBI pointed to an increase in output in May, but much lower-than-expected forward order growth. Similarly, German manufacturing data continued to accentuate weakness in its industrial sector which kept producer price growth low even when not considering the decline in energy. Canadian CPI data for April showed more direct evidence of disinflation as it came in in-line with expectations, up 2.7% YoY, which meant the disinflation trend was intact.

In general, the macro data appears to be a bit of a wash, and the strongest headwind for equity prices today is probably fading momentum. The S&P 500 and NASDAQ are at or near all-time highs, and that push has come on days with falling volume. The last month of trading in the S&P 500 has seen gains of about 5%, so it's probably about time for a pause until we get more data. On top of that, there are several Fed speaking events this week, and these speeches have been very careful to give the impression that the Fed is in a hurry to cut rates. The Federal Reserve's Bostic makes the most concrete reference to a cut, suggesting it wouldn't come before Q4: "I am expecting inflation to decline but relatively slowly, would not expect a rate cut before the fourth quarter.” It's important that investors don't get carried away with expectations of rate cuts, so pauses like today are healthy.

Markets Defaulting to Rate Cut Narrative

Jacob Hess
May 20, 2024

As we kick off NVIDIA earnings week, global markets are showing mixed signals. The overall economic environment is characterized by a gradually slowing economy and the default expectation of global rate cuts by central banks. However, rising commodity prices signal ongoing inflation concerns.

Equity futures continue to inch upwards, with the S&P 500 gaining 0.13%, NASDAQ climbing 0.18%, and the Dow increasing by 0.07%. Volatility remains low, with VIX futures testing 13.5, the lowest since February. This stability in equities is largely driven by the narrative of impending global interest rate cuts, despite a gradually slowing economy.

NVIDIA's upcoming earnings report is highly anticipated as the company has been a key driver of S&P equity gains this year, nearly doubling its stock value. This follows an impressive performance last year, where NVIDIA tripled its value.

Asian markets posted gains across the board with China up 0.54%, Japan 0.73%, Australia 0.63%, and the Hang Seng Index 0.42%, nearing 10-month highs. In Europe, markets also moved higher, except for Italy, where many companies were trading ex-dividend. The Euro STOXX 600 rose by 0.16%, Germany by 0.46%, the FTSE by 0.11%, and France by 0.52%.

The Bloomberg Commodity Index continued its upward trend, increasing by 0.4% and up 7.8% year-to-date. This surge in commodity prices hints at persistent inflation. Brent and WTI oil prices reversed earlier gains to fall about 0.45%, influenced by Middle Eastern geopolitical events and upcoming OPEC meeting on June 1st. Gold also hit a new high of $2,450 before retreating to $2,425, driven by geopolitical tension and potential Fed rate cuts.

The rapid rise in Henry Hub natural gas futures, up 2.4% to $2.69 today, is causing inflation worries as bulls latch onto reports of increased power consumption due to hot weather and AI development.

Today's macro data pointed to economic weakness. Japan's tertiary industry index fell by -2.4% month-over-month, largely due to a drop in wholesale trade. Mexico's retail sales also declined by -1.7% year-over-year. Both data points underscore the global economic slowdown following a strong Q1.

Multiple Federal Reserve speakers are scheduled this week, with indications that the economy is slowing down gradually. The Bank of England (BoE) remains cautious about cutting rates due to recent inflationary pressures. The People's Bank of China (PBoC) held its prime rates steady, focusing on stabilizing the real estate sector.

Political uncertainty is on the rise after the deaths of the Iranian president and foreign minister in a helicopter crash and the Saudi crown prince canceling a trip due to health issues. However, initial reports suggest no foul play in these events.

Markets across the globe have generally defaulted to the prevailing narrative that major central banks are set to cut interest rates beginning in the summer which will broadly ease financial conditions by reducing the cost of borrowing. There were very few macro data releases today, but the ones that trickled came in below expectations (Japan service sector, Mexico retail sales). Sitting side-by-side with the cutting narrative is the view the economies are slowing from what can be perceived as a slightly hotter-than-expected Q1. This is mostly true for developed markets like Japan, Europe, and the US.

The key pushback against the view that economies are gradually slowing and inflationary pressure that was seen in Q1 to be sticky in some countries and increasing in others is the trend in commodity prices. The GSCI commodity index is up 0.5% and 11.3% YTD, and the London Metal Exchange index is up 2.3% today and 21.0% YTD. The rise in input costs which will flow into producer prices and very likely flow into consumer prices is keeping some central bank policymakers wary of dropping interest rates too soon. The threat of geopolitical tensions rising as a result of the death of the Iranian president is likely empty as the first notes from reporting organizations suggest that the helicopter crash was an accident. VIX is sitting at a 2024 low of 12.21 despite rising 1.8% in early trading. Downside risks are creeping up on the bull case of strong corporate earnings of which Nvidia will be championing on Wednesday.

Another Hot CPI Report is Likely to Push Back Rate Cuts

Jacob Hess
April 10, 2024

The March CPI report felt like it was a bit more important than usual as many were starting to doubt the continuation of the trend of disinflation that was seen in the final quarter of 2023. After the release of the data, those doubts have only intensified. CPI grew 0.4% MoM and 3.5% YoY in March, beating expectations of 0.3% MoM and 3.4% YoY and reflecting a slight acceleration in consumer prices from February's annual rate of 3.2% YoY. The MoM rate of 0.4% is the second straight increase of the pace and faster than the growth observed in the October 2023 to January 2024 when the disinflationary trend was strongest. With March data now in, we see that CPI grew 1.1% QoQ in Q1 2024, much faster than 0.5% QoQ in Q4 2023 and the fastest since 2.6% QoQ in Q2 2022.

Core CPI inflation, at 0.4% MoM and 3.8% YoY, saw a similar trend in that it saw a gentle acceleration in the annual rate and both the monthly and annual increases were higher than expected. The 0.4% MoM increase is the third in a row and a noticeable acceleration over the MoM rates at the end of 2023. We can see that near-term inflationary pressures have gotten worse in this less volatile segment in the quarterly rates just like we saw when including food and energy. In Q1 2024, core CPI grew 1.1% QoQ, up from 0.8% QoQ in Q4 2023 and the fastest since Q1 2023. The evidence continues to build against disinflation.

Let's look at some of the details that stuck out:

  • Food inflation looks to have more or less returned back to the 2% target. Food prices were up just 0.1% MoM in March after being flat in February and the annual rate is now 2.2%. Food at home prices were flat for the second month in a row, and while that doesn't help the absolute level of food prices, it does provide some relief to consumers who felt like grocery store prices were getting away from them. Food away from home is hotter, up 4.2% YoY and averaging growth of about 0.3% MoM in Q1 2024. That still seems linked to services supremacy.
  • Energy CPI had been deflationary some time but is not back up to growing around 2% on an annual basis after two strong increases in February and March. The gasoline and electricity indexes were up 1.7% MoM and 0.9% MoM respectively, and the natural gas index was unchanged. Based on current trends in commodities, it looks like energy prices will continue on a gradual incline which will have a significant impact on the headline rate.
  • The shelter index increased another 0.4% MoM with both rent and owners' equivalent rent increasing at that same rate. Though growth has downshifted, the increase in the shelter index remains the largest factor in the core CPI MoM gain. This index continues to be discounted for its lagging nature. When disregarding it, core CPI is up 0.3% MoM and is much closer to the Fed's inflation target on an annual basis at 2.4% YoY (however, this is up from 2.2% YoY in February). Using an alternate shelter index from Zillow/ApartmentList data puts core CPI at around 1.8% YoY.
  • The transportation services subcomponent is being singled out for its rapid rise in the last three months where it averaged monthly growth of 1.3%. The annual growth of this index, which has a relative importance of about 6.39 ppts, is 10.7%. Under the hood, we see spikes in motor vehicle insurance (up 2.6% MoM and 22.2% YoY) and motor vehicle maintenance (up 1.7% MoM and 8.2% YoY) that are driving transport services prices higher and in turn leading to stickiness in services inflation which is stuck over five percent on an annual basis at 5.4% YoY.
  • While services is hot, goods is cool. Excluding energy commodities, goods CPI contracted in March at -0.2% MoM and is down -0.7% YoY with new and used vehicles dragging the index lower. Apparel did print its second hot MoM rate in a row (0.6% MoM in February and 0.7% MoM in March), and medical care commodities are up 2.5% YoY, but in general, we continue to see goods in disinflation.
  • If we do some more excluding from core CPI of shelter which is considered lagging and of used cars which has been volatile over the last two years, we see that Supercore CPI (ex-energy, food, shelter, used cars) was up 0.4% MoM and 2.6% YoY in March, an acceleration from 2.4% YoY in February. To zero in on core short-term inflationary pressures, we can look at the 3Mo3M% annualized rate. It now sits at 4.4% after a few consecutive hot readings, and this is the highest since February 2023 when it was at 4.1%.

The reaction to the hot report was more pronounced than usual. Treasury yields shot up after the CPI release with many rates reaching the highest level of 2024. Major index futures all sold off by about a full percentage point and are trending that way so far in morning trading. The Russell 2000 was down almost -3% at the morning low. It appeared that the March CPI report seems to have struck a nerve in particular. The newest data suggests that the Fed will have to admit that it can't cut three times this year or at least that June and maybe July are off the table. At the very least, the market believes that FOMC members have to back down as many speakers said they would if the disinflationary trend subsides. Also following the CPI release, the probability of a June rate cut according the CME's FedWatch was crushed down to 21.1% today when yesterday it was at 56.1%. This is a consequence of the Fed insisting on being data-dependent. When the data moves, the market responds to it. And that limits the Fed's flexibility.

Jobs Growth Gained Momentum in Q1 2024 Despite Higher Rates

Jacob Hess
April 05, 2024

The US labor market remains a powerful force, relentlessly cranking out jobs. In March, nonfarm payroll employment increased 303,000, the strongest job gain in almost a year (303,000 back in May 2023) and above consensus expectations of 214,000. In addition to that, there were no major changes to January and February numbers. In total, revisions added just 22,000. The robust job growth caused the unemployment rate to dip slightly to 3.8% after the increase to 3.9% in February. Momentum in hiring has accelerated each month so far in 2024 according to the three month moving average, accentuating how hot the current labor market still is. After a year of strong job growth the three month average is only marginally lower, 305,000 in March 2023 to 276,000 in March 2024 (up from 243,000 in January 2023).

The establishment data shows that job growth was exceptionally strong across the service and public sectors while the goods sector saw moderate growth itself. As a whole, the service sector added a majority of the 303,000 jobs with an increase of 190,000. The strongest industries within that sector were education & health services (+88,000), other services (+71,000), and leisure & hospitality (+49,000). Utilities was the only service industry to note a loss in employment, with a decline of only -400. Also showing strength was the public sector which saw hiring of 71,000 in March. Government job growth continues to be fueled by strong fiscal growth that has filled in for gap left by monetary policy as the Fed maintains restrictive rates.

The household data echoed the establishment data's strength with a reported 498,000 increase in employment and a -29,000 decline in unemployment. This meant that all of the 469,000 individuals who joined the work force in March successfully found a job which is a notable sign of strong labor demand. Both the labor force participation rate and the employment-participation ratio grew 0.2 ppts to 62.7% and 60.3%, respectively, which is a good sign for the supply of labor. In another show of strength, we see that unemployment was mostly voluntary for those exiting a job. Specifically, the number of unemployed who were job losers (or who completed temporary jobs) fell -174,000 to 3.0 million while the number of unemployed who were job leavers grew 112,000 to 823,000.

Finally, we have the wage data. Average hourly earnings grew 4.1% YoY in March, down from 4.3% YoY in February. This was in-line with the expectation that wage growth would continue its gradual deceleration and contradicted the surge in the ADP's Job Switcher Annual Pay growth rate from 7.6% YoY in February to 10.0% YoY in March seen earlier this week. Goods wage growth accelerated slightly with a strong MoM rate of 0.6% MoM, but services wage growth was weaker, and the annual rate of growth fell below four percent to 3.9% YoY.

The market is taking the 3XX,XXX headline jobs number and running with it. Rates jumped right after the report was released including a 7 bps move in the 10-year Treasury yield to 4.39%, the highest since November 2023. Additionally, Fed Funds futures saw a hawkish adjustment as the probability of a June rate cut moved closer to a coin flip at 55.5% which is down from 65.8% yesterday. July cut probabilities also shrank. In response to the short-term adjustment in rate expectations, S&P futures pared the light gains of the morning.

Are these hawkish moves justified? Probably, but they should not be carried on for too long. It is easy to focus on the robust headline jobs growth but that does not accurately describe the situation in March. The 0.2 ppt increase in the participation rate is very good news for labor supply after a short-term move lower from 62.8% in November to 62.5% to start 2024 threatened to prolong the threats of labor shortages. On top of that, wage growth did continue its deceleration. The combination of strong job growth and easing wage growth is a dream scenario for the Fed as it satisfies the dual mandate and gives the Fed room to cut if it needs to as price pressures would be less of a concern. The bottom line is, the US economy is still very strong and unemployment is unlikely to be a problem in 2024.

PCE Inflation Meets Forecasts, Yet Fed May See Hawkish Signs

Jacob Hess
March 29, 2024

After a slightly underwhelming January income and outlays report where consumers appeared to be taking a step back from spending, February data provided a bit of a counter to that account. While personal incomes were up just 0.3% MoM and real disposable income actually declined on the month (down -0.1% MoM), personal consumption expenditures expanded 0.8% MoM and when accounting for inflation were up 0.4% MoM. The consensus estimates expected income to be slightly stronger at 0.4% MoM vs 0.3% MoM reported and consumption to be much weaker at 0.5% MoM vs 0.8% MoM reported. This data lends some credence to the narrative that colder weather in January was had an economically chilling effect and there was a slight bounce from that in February.

Spending was relatively strong across both goods and services with the former up 0.5% MoM and the latter up 0.9% MoM. Goods spending was boosted by a strong increase of $28.5 billion in motor vehicle and parts sales as there was a noted pick up in the sales of new light trucks. Behind that category were gains in every service industry including transportation services up $17.0 billion, housing & utilities up $16.3 billion, and recreation + food services & accommodation up $16.3 billion. US consumers remain committed to portioning a large slice of their budgets to services, and that trend has not really faded away.

The all-important PCE price indexes looked to be mostly nonevents. All of the main rates came in in-line with consensus expectations except for the headline MoM move which was a tick below. The core PCE price index grew just 0.3% MoM which matched consensus projections as did the annual rate of growth at 2.8% YoY. At that rate, the Fed's main gauge of inflation is now at the lowest since March 2021. However, other data points that are key to the Fed are pointing to sticky inflationary pressures. Personal income growth is still strong at 4.6% YoY (though this slowed from 4.9% YoY in Jan), and the annualized rate of average of the last three MoM gains in income is over 6.5%. Similarly, services inflation is sticky at 3.8% YoY in Feb, down only 0.1 ppts from 3.9% YoY in Jan. The annualized rate of the average of the last three MoM gains in services prices is a touch above 4.9%. At the moment, it is base effects that is keeping annual rates on a trend of gentle deceleration while underlying near-term trends are strong.

Nothing summarizes the current consumer landscape more than the trend in the personal savings rate. With consumer spending remaining robust in February, the personal savings rate dropped to 3.6% which was down from 4.1% in January and the lowest since December 2022. It seems that higher interest rates are not necessarily tightening the purse strings of the US consumer despite that being one of the goals of the Fed. This could be a signal that inflation expectations are settling higher than pre-pandemic levels as consumers struggled to shake the feeling that inflation is becoming entrenched. While year ahead inflation expectations have come down from above 4%, they have settled at or just below 3% in the last four months, according to the most recent UMich Index of Consumer Sentiment data. This is slightly higher than the average expectation of 2.64% YoY inflation from 2015-2019.

With all this being said, the Fed should not make any major changes in their position on rate cuts as a result of this report. If anything, it should give a bit of a hawkish tilt to some FOMC members who will want to continue to stress caution when it comes to loosening monetary policy.

2024 Inflation is Off to a Hot Start

Jacob Hess
March 12, 2024

The latest data from the US Bureau of Labor Statistics reports that the Consumer Price Index (CPI) grew by 0.4% month-on-month (MoM) and 3.2% year-on-year (YoY) in February, a slight uptick from the 3.1% YoY reported in January. Core CPI, which excludes volatile food and energy prices, also saw a 0.4% MoM increase but moderated to 3.8% YoY from 3.9% YoY previously. Consensus expectations were beat almost across the board. Forecasters had CPI MoM at 0.4% and YoY at 3.1%, and for core CPI had MoM at 0.3% and YoY at 3.8% YoY. The biggest news is the monthly core CPI inflation beat as it calls into question when the disinflation trend of 2023 will pick back up in 2024.

Breaking down the CPI segments:

  • Food prices remained relatively flat, with the food at home index unchanged and food away from home registering a mere 0.1% MoM increase. Notably, six out of six major grocery group indexes decreased during the month, driving food inflation down to 2.2% YoY, the lowest level since May 2021.
  • Energy prices rebounded by 2.3% MoM in February, with notable increases in gas and natural gas prices of 4.3% MoM and 2.3% MoM respectively. Electricity prices were more muted at just 0.3% MoM. While energy CPI did jump on the month, it is still down by -2.3% YoY (notably higher than the -4.6% YoY in January).
  • Core CPI outpaced expectations with a 0.4% MoM increase, driven primarily by a 0.4% MoM growth in the shelter index. Shelter prices maintain a hearty gain of 5.7% YoY. Despite the moderation in YoY core CPI growth to 3.8% YoY, which is the lowest since May 2021, concerns persist as the deceleration in core prices does not seem fast enough.
  • Goods prices saw a slight uptick, ending three months of deflation, with used cars bouncing back 0.5% MoM after a drop of -3.4% MoM in January. Apparel provided a meaty gain of 0.6% MoM itself. In general, however, goods prices are still down -0.3% YoY.
  • On the services front, inflation maintained its momentum at 0.5% MoM in February after a 0.7% MoM increase in January. The monthly gain was driven by increases in transportation services, up 1.4% MoM (second 1%+ gain in a row) and shelter up 0.4% MoM. Airline fares prices were a major cause of the rise in transportation services as they grew 3.6% MoM February, adding on to a 1.4% MoM gain in January.
  • The Supercore CPI index, excluding food, shelter, energy, and used cars, grew by 0.3% MoM and 2.4% YoY, down marginally from 2.5% YoY previously. When just removing shelter from CPI, prices are up just 1.8% YoY; however, at a monthly rate of 0.5% MoM, they grew at an annualized rate of around 6%.

The February CPI report is definitely a hot one. With the exception of food prices, which were flat on the month, the key CPI segments substantiated the case that inflationary pressures of strengthening in 2024. A good measure that demonstrates this is the near-term three month annualized average of core CPI. That number has creeped back above 4% for the first time since June 2023 at 4.18%. The medium-term six month average also increased to 3.85%, the highest since July 2023. Finally, we can do a bit of data cherry-picking to get an even more frightening number. The annualized rate of Supercore inflation so far in 2024 (average of Jan-Feb) comes in at 4.3%, more than double the 2% inflation target that the FOMC wants to achieve.

The March FOMC meeting is more-or-less settled. Even after the hot February CPI report, Fed Funds futures prices in a 99% chance of no move later this month with that other 1% dedicated to a rate cut. The next meetings to consider are in May and June and both are now seeing lower probabilities of rate cuts following this morning's report. Specifically, the May cut probability fell from 18.0% to 9.1%, and the June cut probability fell from 71.6% to 65.4%. More important to those probabilities will be the guidance provided by the Fed's projection. As of December, the Fed expects around 75 bps of cuts in 2024, which was an increase from the 50 bps expected in the September projections. A reversal in disinflation could cause 2024 rate cut projections to be cut back to that 50 bps level which would be a corrective of a bond market where the 1-year Treasury yield is trading just below 5% (as of 10:30 am).

The bottom line is that inflation is too hot in 2024 so far, and it may catch the market out since investors are trading partly on the AI tech boom and partly on the hopes for rate cuts sooner rather than later. Based on the current trend in inflation, that second tailwind is likely to fade and could become a headwind in the near future.

Getting Back on Track to Disinflation: February 2024 CPI Preview

Jacob Hess
March 11, 2024

The market gets only one day of rest between the February jobs report and the February CPI report which is set to come out on tomorrow on Tuesday, March 12. The highly anticipated report is the last one before the Fed begins in next policy meeting later this week. The outcome of this meeting had at one point been a highly uncertain one as many thought the Fed could start cutting rates this month. However, the investors have eventually agreed that there will be no change in the Fed funds rate at the March meeting. Nevertheless, February inflation data will still be crucial in helping to decide how the FOMC members will shape their expectations that will be communicated in the update of the Summary of Economic Projections.

In January, CPI grew at the fastest monthly pace since September 2023 at 0.3% MoM, officially marking an end to the cool streak in Q4 2023. Despite that, the annual pace cooled from 3.4% YoY in December to 3.1% YoY in January. The more concerning number was a 0.4% MoM increase in the core CPI which was the highest since April 2023, and this caused the annual rate to stay at 3.9% YoY to start 2024. At an annualized rate, January CPI grew 4.8% whereas it had been running at an annualized rate from the low-to-mid 2% to high 3% range in Q3 and Q4 2023. The obvious concern is that disinflationary forces have pulled back, and the January report showed that there was evidence that this has been the case since the softness in pricing in Q4. The February report could exacerbate this concern or help provide some much needed relief to the Fed who have voiced their concern over the data recently.

  • Financial conditions eased significantly in the last half of 2023 according the Chicago Fed national Financial Conditions Index and eventually reached the easiest level in two years in January at -0.495. That has slightly reversed in February to -0.473 (a largely miniscule change).
  • The Manheim Used-Vehicle Prices Index moved down just -0.1% MoM in February. With no seasonal adjustment, the index actually increased 1.7% MoM. After a -3.4% MoM drop in the used car index in January, we're likely see a positive rate there in February.
  • On a more deflationary note, retail sales excluding gas stations fell -0.8% MoM which could be a precursor to weakening consumption. However, food services & drinking places sales were up 0.7% MoM which is not a disinflationary sign in recreation and food away from home pricing.
  • In terms of how businesses have talked about their pricing in February, the ISM Manufacturing Prices index remained in a slight expansion at 52.5, and the ISM Services Prices index also pointed to moderate price inflation at 58.6 (although it did fall -5.4 pts from the January index). We will get small businesses' February pricing indexes tomorrow, but if we just look at the last few Price Plans readings, we see a slightly inflationary trend. Nov-Jan readings averaged 33 which if above the lows of 2023 but below the highs of 2022.
  • In terms of statistical trends, the January and February 2023 core CPI monthly rates were high relative to the months around it at 0.427% MoM and 0.467% MoM. With the former rate falling out of the calculations, this should give some leeway to slightly hotter rates for February 2024 in terms of how the annual rate will look.

So what numbers should we expect tomorrow? The consensus estimate sees US CPI growing 0.4% MoM and 3.1% YoY (Jan: 3.1% YoY), and US Core CPI growing 0.3% MoM and 3.7% YoY (Jan: 3.9% YoY). In other words, expectations are seeing a slightly cooler report than January, but one that doesn't necessarily quell the concerns the Fed may have about the path of disinflation. An upward surprise on the core MoM number could cause a pause in the recent drop in yields (the 2-Year Treasury is down from 4.73% to 4.50% in the last two weeks). Unfortunately, I think an above-expectations reading is likely the case, and I have a 0.4% MoM rise penciled in for tomorrow. The main drivers of inflation will be services maintaining its momentum and used cars reversing from the Jan drop and keeping goods deflation in check. The result of the overshoot will be the YoY rate also coming in above consensus at 3.8% YoY, though this will be a slight deceleration from January.

Employment Preview: Moderating but Strong Labor Market

Jacob Hess
January 03, 2024

Another jobs report is coming this week, and it will be the biggest economic news of 2024 once it is released. However, it will be reporting on how the previous year ended and provide important context to a Fed that described job gains as having “moderated” but still “strong”. In the context of sharp monetary tightening, in 2023, that assessment is definitely fair.


In November, the establishment survey found that 199,000 jobs were added which topped both the previous month’s gain of 150,000 and the consensus estimate of 180,000. What was also noteworthy was that downward revisions were mostly inconsequential with just a -35,000 change to the September number. As these gains have moderated, the unemployment rate has started to trend upward. Despite the rate falling -0.2 ppts to 3.7% in November, it had reached 3.9% in the month before (about 0.5 ppts off the trough of 3.4% in April 2023). The Fed sees an unemployment rate of 3.8% to end 2023 which is what it has projected since September. This is significantly lower than the 4.6% projection that the Fed set in December 2022.

The consensus estimate for the nonfarm payroll increase in December 2023 sits just below the November number at 168,000 meaning that the trend of “moderating but strong” job gains is likely to continue. Analysts have also matched the Fed’s view of the unemployment rate reaching 3.8% in December. These results would be indicators of the continuation of the tight labor market where businesses are still finding their demand for labor unmet. Thus, the it is also expected that upward pressure on wages remains at the end of 2023. The consensus on that is an 0.4% MoM uptick which will push the YoY average hourly earnings gain back to 4% YoY.

An important factor in staffing levels in December is the demand for holiday shopping in the first two-thirds of the month. Mastercard reported that total holiday retail sales grew 3.1% in 2023 over 2022 with online sales up 6.3% YoY and in-store sales up 2.2% YoY. The moderate gains in consumption were likely enough to keep businesses hiring in December, but weaker in-store sales gains suggests the impact will not be large for retailers. However, food services and drinking places likely felt the need to boost their employment as holiday spending in that segment jumped 7.8% YoY. Therefore, I see the leisure and hospitality sector leading the jobs gains in the December report (around 100,000 jobs added) while the retail trade industry could lag a bit below what might be usually expected during the holiday season (around 20,000 jobs added).

In general, my expectations are that nonfarm payrolls should increase by about 150,000, and the unemployment rate should tick up to 3.8%. The latter could be a bit of an underestimation if the trend of higher participation is extended into December. November saw a strong increase of 532,000 in the labor force which pushed the participation rate up 0.6 ppts above where it was in November 2022 at 62.8%. I expect participation to continue to increase in early 2024 as consumers continue to spend down their cash stockpiles and sticky wage increases coax more people off the sidelines. This is likely one of the keys to the Fed’s path towards a looser a labor market.

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