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Zdjęcie autoraJarosław Jamka

Subjective market review (19-Jan-2023)

... or what caught my attention:


1) Initial claims have fallen to the bottom of the cycle.


Initial Claims fell to 187,000, which is only 5,000 above the cycle low of September 24, 2022. This could indicate a very tight labor market, but this is not necessarily the case. In September 2022, data on initial benefits were also confirmed by Continued Claims (1.302 million vs. today's 1.806 million) and the unemployment rate (3.5% vs. today's 3.7%).


Overall, initial claims data is both highly volatile on a weekly basis (including across states), not to mention large differences between the unadjusted and seasonally adjusted series (e.g., unadjusted initial claims were 289k – so more than 100k above adjusted series). On top New York State recently had a spike in initial claims, which are now falling significantly - last week they went up by 20.5k, this week they went down by 17.2k).


In any case, the data should be taken with a pinch of salt, which does not change the general conclusion that the labor market is tight and the worst thing is that the situation is currently not deteriorating - which is what the market would expect under the scenario of cutting interest rates.


We are also not quite where we were with the labor market in September 2022. The labor market has weakened a bit since then, which is also confirmed by other data series (apart from the data on unemployment benefits). Details in Figure 1. Figure 2 shows the variability of initial claims in New York State.



 

2) Will the Fed “help” Biden in an election year?


In an election year, both investors and the economy itself  "are counting on more." History only confirms this. Can the Fed take this into account in its decisions? This is one of the threads that could help explain FED pivots that are not explained by economic data or, for example, the Taylor rule (like the one from December 13, 2023).


An interesting analysis in this regard was posted by J. Ricards (link). Some key highlights:


“On the one hand, the Federal Reserve has always maintained they are above politics (…). Of course, that’s nonsense. The Fed has always been highly political. It’s just that they’re very good at hiding it”,


“Fed Chairman Jay Powell is a Republican, but he is definitely a "Bush Republican". This wing of the party despises Trump as much as the Democrats, if not more in some cases. Powell is too smart to take the bait on this latest challenge, but he is listening. And the Fed might actually be right this time when it says it’s independent of politics”.


“The truth is, Powell may end up cutting interest rates in June or July anyway, regardless of politics. He won’t do this to help Biden or hurt Trump. He’ll do it because the U.S. economy will be headed for a severe recession by then and Powell will be getting the blame for the recession. So Powell may be able to finesse his way through this political minefield. He’ll get to cut rates this summer (because of recession), keep the Democrats happy (because he cut rates) and keep the Republicans happy (because he caused a recession in the process)”.

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