What Recession?

TLDR:

1. Powell Slips During FOMC Press Conference
2. NFP - 517K+ jobs in January. Way above expectations of 18K
3. BTC breaks above 24k, ETH touches $1700.

It’s over 500k! Never has there been so much agreement between economists that a recession is going to happen in 2023.

‍

Except… When was the last time we were creating 500k jobs a month in a recession? Non Farm Payrolls blindsided everyone last Friday, handily beating the highest estimate of 300k+ jobs. In a knee jerk reaction, bonds sold off and equities tanked on the prospect of tighter monetary policy.

If you step back a minute. Don’t forget what the report is actually telling you. 500k+ jobs a month is GOOD. It’s really difficult to have declining earnings and gloomy prospects when people are getting jobs left and right with wage growth coming in at a respectable 0.3% MoM.

So now I’m calling it. This is the last week of “good news is bad news”. It’s really hard to see any other positive developments hurting the economy when by all intents and purposes, inflation has been coming down, and job growth has been healthy. Has the Fed done it? Has it actually achieved a soft landing? It’s a bit early for this, but I begrudgingly have to admit that it is trending in that direction, although much depends on factors well outside of the Fed’s control.

Powell Slips During FOMC Press Conference

Someone asked Powell whether he was concerned about the implicit easing of financial conditions as markets rally and term yields drop to multi month lows. He should have just said “Yes”. But instead, he did not push back and the market exploded in response. Can you guess when this happened?

Source: Yahoo Finance

In comparison, 500k jobs has only managed to push markets down ¼ of the way back to Wednesday’s levels. That means going forward, a lot more people will flip from bearish to bullish, not just due to technicals and easing financial conditions, but also because of actually better economic data. What a novel concept!

NFP Stuns

Besides the headline job numbers. Everything about Jan’s numbers were pretty impressive. The job gains were broad-based, with huge wins focused on the service and hospitality sector. The unemployment rate fell 0.2% to 3.4% which is amazing in the context of a 0.3% higher labor participation rate.

Even the average hourly earnings were healthy. This is the last sticking point in the Fed’s inflation concerns, and 0.3% was just as expected. However, unlike equities, bond markets were not happy with this at all. 

‍

Source: Yahoo Finance

TLT, an ETF of long term bonds, dropped nearly 2% on the news (long end yields are up ~10 bps), a much more aggressive move than equities. The prospect for more hikes has appeared, and those risks are magnified if you are to extrapolate out the impact over the course of 30 years.

Crypto Holds Onto Gains

Oddly enough, crypto is holding its own despite the massive change in the trajectory of rate hikes. This is definitely supportive of the asset class although at this point it’s not clear why crypto is outperforming other than just an insanely negative outlook post FTX fallout. Crypto has been on a tear this year. Handily even beating out Big Tech by a factor of 3.

Source: Yahoo Finance

Given how aggressively rates have responded to the NFP numbers, crypto might encounter challenges in the coming weeks due to its historically high sensitivity to interest rates. As rate expectations shift higher, the tailwind of the end of hikes will turn into a headwind as traders reassess the Fed’s plans.

We have CPI on Feb 14th, and if it reaffirms the strong NFP numbers, many will not only be updating their positions, but also their medium term outlook. This will have a much larger impact on asset allocation decisions in the coming months than a simple reaction to economic data.

Ivan’s Take

How quickly has a single week changed the sentiment. Equities have been jubilant with a straight line up in the month of Jan, only to be shown a rude awakening in Feb. When gains come in too fast too furious, it’s only natural to put on the brakes and reassess. 

There is an oft used marketing pitch for stocks, where they say if you miss the best 30 days of trading in the last 10 years, it would have cut your gains by half. However, what they don’t tell you is, what if you missed the 30 WORST days? I haven’t computed this, but my hunch is that the benefit would be even larger. 

So given next week’s CPI numbers have the potential to change the entire narrative, why not sit it out for a few days to see how this shakes out? See you next week!