A 'soft landing' is being priced in. That doesn't make it more likely: Morning Brief
Friday, February 3, 2023
Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared. Read this and more market news on the go with the Yahoo Finance App.
Later this morning, Wall Street expects the Bureau of Labor Statistics to report that a robust 188,000 jobs were added to the U.S. economy in December — along with a small tick up in the unemployment rate to 3.6% — still well under the five-year average of 4.9%.
If the numbers print roughly as expected, this sanguine assessment of the American job market will likely only reinforce the big investor takeaway from this week's Federal Reserve decision — that the U.S. will avoid recession as the Federal Reserve successfully navigates a "soft landing."
This soft landing is the holy grail for the Powell Fed: An economy in which inflation comes back to the Fed's 2% target and doesn't tip into recession filled with a spike in job cuts and pain.
"Many forecasters would say [a soft landing is] not the most likely outcome ... But I would say there's a chance of it," Powell said in a press conference on Wednesday.
Powell leaned into "disinflation" rhetoric, which investors absolutely loved. The Nasdaq spiked over 5%, adding to a furious rally that followed the index's best January return in two decades, where it rose 10.7%.
The strength in stocks since Wednesday bucks the trend over the last three Fed meetings, which saw stocks sold off sharply after the central bank's policy announcement and throughout Powell's Q&A.
But some investors have taken notice of the growing divergence between Fed rhetoric and economic reality.
"The window for the (misplaced) soft landing narrative is now extended," tweeted Alfonso Peccatiello, founder and CEO of The Macro Compass.
Why misplaced? In Peccatiello's view: "The first innings of a recession always look like a soft landing, as growth and inflation come down but not to alarming levels yet – exactly like [today's environment]."
Here's a Reuters article he points to from 2007 that could pass for something published yesterday — "U.S. economy on track for soft landing - Dallas Fed."
Contrast the current post-Fed euphoria with Peccatiello's tweet only a few days back: "In 4-5 months, I expect the US to be in a recession."
Peccatiello laid out four macro indicators that point to a "bad" U.S. recession by the end of the second quarter this year. Specifically, these indicators are the global credit impulse, the Conference Board's leading indicators index, the NAHB housing index, and the Philly Fed's new orders index.
"Pricing in a soft landing doesn’t actually mean we are going to get a soft landing," Peccatiello said.
The result is that investors have two epically diverging views of the economy — and it's the stock bulls betting on the soft landing who are currently winning.
But according to Peccatiello, the bulls can get runover in two different scenarios — (1) if economic data comes in hot, forcing Powell to amp the hawkish talk once again, or (2) if economic data comes in "recessionary-like," meaning very weak, which takes the soft landing off the table.
In other words, it will take Goldilocks data — not too good, but not too bad — until the Fed's next meeting in mid-March to avoid the nasty conclusion that we're heading for recession.
What to Watch Today
8:30 a.m. ET: Two-Month Payroll Net Revision, January (-28,000 prior)
8:30 a.m. ET: Change in Nonfarm Payrolls, January (190,000 expected, 223,000 during prior month)
8:30 a.m. ET: Change in Private Payrolls, January (190,000 expected, 220,000 during prior month)
8:30 a.m. ET: Change in Manufacturing Payrolls, January (6,000 expected, 8,000 during prior month)
8:30 a.m. ET: Unemployment Rate, January (3.6% expected, 3.5% during prior month)
8:30 a.m. ET: Average Hourly Earnings, month-over-month, January (0.3% expected, 0.3% during prior month)
8:30 a.m. ET: Average Hourly Earnings, year-over-year, January (4.3% expected, 4.6% prior month)
8:30 a.m. ET: Average Weekly Hours All Employees, January (34.4 expected, 34.3 during prior month)
8:30 a.m. ET: Labor Force Participation Rate, January (62.3% expected, 62.3% during prior month)
8:30 a.m. ET: Underemployment Rate, January (6.5% prior month)
9:45 a.m. ET: S&P Global U.S. Services PMI, January Final (46.6 during prior month)
10:00 a.m. ET: S&P Global U.S. Composite PMI, January Final (46.6 during prior month)
10:00 a.m. ET: ISM Services Index, January (50.5 expected, 49.6 during prior month, revised to 49.2)
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