Weekly Market Update: February 13, 2023

The nation created an estimated 517,000 jobs in January. That figure far outpaced the consensus forecast of 187,000. The employment rate inched lower, to 3.4%, the lowest level in more than five decades. The data indicate that the U.S. labor market is still very tight, potentially creating a problem for the Federal Reserve in its fight to tame inflation.

The jump in January nonfarm payrolls drove Treasury market yields higher. That upward movement short-circuited the stock market rally that kicked off the new year. Federal Reserve Chairman Jerome Powell said the central bank will be data driven in formulating monetary policy. His view is that “disinflation,” or a downtrend in the pace of inflation, has begun. Based on that, the stronger job figures should not change the view of senior Federal Reserve officials that the rate increase path will come to an end with a 2023 federal funds rate just over 5.00%. It should be noted that the spread between the Fed’s 2023 federal funds target rate and the market’s consensus narrowed.

The Federal Reserve raised the benchmark short-term interest rate by a quarter-point, to a range of 4.50% to 4.75%, this month. It also sees ongoing rate hikes as appropriate to push interest rates to a “sufficiently restrictive” level likely needed to stamp out inflation and return pricing growth to the bank’s desired target rate of 2% in time. The lead bank sees “disinflation” in the prices of goods, but few signs of lower prices in the services sector.

What effect have the Fed’s restrictive monetary policies had on the economy and Corporate America? Although some sectors of the economy are weakening (i.e., residential construction and manufacturing activity), the strong jobs data have kept the scenario of a “soft landing” without a significant recession in play. However, the corporate picture is a bit murkier, with profits for S&P 500 companies estimated to have fallen around 5% in the fourth quarter. The prognostications for the next few quarters have come down too, with many of the mega-cap technology companies warning of tougher operating conditions ahead and implementing a number of layoffs.

Conclusion: Headwinds for the market, including restrictive monetary policies and slowing corporate earnings growth, remain in place.

Source: ValueLine.com