The Week Ahead – Offside Penalty: Five Yards

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Of course, this Sunday is Super Bowl LVII, featuring a matchup between the Kansas City Chiefs and Philadelphia Eagles. Fun fact: this will be the first time in NFL history two brothers have played against each other in a Super Bowl. Donna Kelce has gained fame for the half-and-half top she’s been sporting, incorporating the colors of her sons’ two teams.

This year has shaped up to be a surprising matchup between market bulls and bears. Those less sanguine on risk-assets were caught offside this week as the US equity market rose another 1.6% - bringing the year-to-date return of the stock market to 8.2%. Bulls were on their front foot (hoof?) on Thursday when Federal Reserve Chairman, Jay Powell delivered a decisively less hawkish tone than the last time he spoke. Stocks seemed to gain momentum on a question regarding recent disinflation impulses despite the strong US labor market. Mr. Powell was asked if that dynamic can continue. Jay Powell’s response was “It’s complicated.” Importantly, he did not lean into the narrative that interest rates would have to continue higher until the labor market softens, tacitly intimating at the “long and variable lags” implicit in rate hikes. Mr. Powell went on to say, “It might be covid distortions causing inflation spikes that are now reversing. Net net…we have to be data dependent.” This was taken as being far less draconian than what was observed at his Davos speech.

I do not believe the Fed Chairman would have struck such a balanced tone if he’d had access to the shockingly positive jobs data that printed less than 24 hours later. The first Nonfarm Payrolls report for 2023 showed a whopping gain of 517,000 jobs in January, far above the consensus estimate of 223,000. On top of the stunning surge in payroll employment last month, revisions to previous estimates lifted December by an even more stunning 813,000! So, payroll employment is now 1,330,000 higher today than it was estimated to be before Friday’s jobs report. Further, the unemployment rate dropped to its lowest level in over 50 years at 3.4%.

This week is light in terms of economic data, but we do have a lot of Fed Governors speaking. Since markets are hinging on where the fed funds rate goes from here, I would expect continued volatility depending on their rhetoric. Inflation expectations, which come out on Tuesday, are likely to keep coming down as highly visible commodity prices such as of food and gasoline have been dropping. As inflation and consumer sentiment are highly correlated, I expect sentiment to continue its recent uptick.

Data Deck for February 6 – February 10: