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Subjective market review (3-Feb-2024)

Zdjęcie autora: Jarosław JamkaJarosław Jamka

This time the employment report is crucial.


If you believe all the data from the payrolls report, it would probably be the most important data point in this cycle, but I suggest limiting your faith in this data and, like the market, taking it into account only to some small extent. Why? They are inconsistent with other data, at the same time they are just after major revisions and concern the month of January, when the difference between the unadjusted and the seasonally adjusted series is the largest (e.g. the number of jobs actually decreased in January by 2.635 million - only after the seasonal correction we have an increase of 353k).


What attracts attention is the increase in earnings, which could end the narrative about defeating inflation. AHE (average hourly earnings) increased 0.6% in January (expected 0.3%), and the annual change is now 4.5% (expected 4.1%). At the same time, the average number of working hours per week dropped significantly from 34.3 to 34.1 hours (which does not fit well with rising wages... less work means a drop in wages, not an increase, ceteris paribus).


Figure 1 shows Powell's favorite series, with the most important being the (quarterly) Employment Cost Index. We still have a long way to go to return to pre-pandemic wage increases (around 3%).



Figure 2 shows the decline in the average number of working hours and, at the same time, average weekly earnings (the annual change is at the bottom of the cycle). And the decline in working hours slowly suggests that we are closer to a recession.



One of the factors leading a future change in wages may be the number of voluntary layoffs of employees (change of job, e.g. due to receiving a higher salary at another employer). Figure 3 shows the so-called Quits Rate for the private sector. The rate of voluntary quits is currently at pre-pandemic levels, which is one of the factors pointing to a decline in wage growth in the coming months.



Bond yields had to react to such data and as a result we had a big bear-flattening of the yield curve, yesterday's yields increased by: 2Y +16bps, 10Y +14bps, 30Y +10bps. As a result, the probability of a rate cut on March 20 is now only 20% (it was 35% before the publication of employment data).


Key data ahead of the FOMC meeting on March 19-20 will be: CPI inflation on February 13 and March 12, payrolls for February on March 8, and PCE inflation on February 29. On March 6, we will also get the Quits Rate for January 2024 (JOLTS report).


To sum up, we can have limited confidence in such data, but the increase in wages is disturbing. Yet, in the coming months there is a chance that the earnings growth will decline. Such data may not bother the stock markets too much, but the bond markets must take it into account in higher yields (but only temporarily, because there is a chance of a decline in wages in the following months).

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