Stock indexes could struggle to find direction this week with very little on the economic data calendar and most of the big name tech earnings behind us. Don’t forget, we do have a President Biden State of the Union address tomorrow night and some say he ill be going after Big Tech, so there could be some nearby headline risk.
Investors today are still trying to digest Friday’s data dump that added more fodder to the conflicting economic picture. The big shock was the January Employment Report that showed a gain of +517,000 jobs, more than double what Wall Street was expecting. The surprisingly strong gain brings the unemployment rate down to 3.4%, the lowest level since 1969. This obviously runs counter to the Fed’s efforts to cool the labor market, which central bank officials believe is helping to buoy inflation.
However, bulls are pointing to the fact that wage pressures moved down again in January, with average hourly earnings dipping to +4.4% from +4.8%, which is in line with the Fed’s goals. The strongest area of hiring was in the services sector, particularly “leisure and hospitality,” which economists say is the likely explanation for declining wages amid a strong hiring trend. Some believe this could be good news for the Fed in the long run for two key reasons – the US labor supply is currently tightest in the services sector and wages there typically run much lower.
In theory, robust hiring in the areas it is most needed could help cool inflation pressures that have stubbornly endured across the services sector. At the same time, if jobs lost in higher paying sectors are being absorbed by the lower paying services sector, it could help further lower headline wage growth while also keeping unemployment low.
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The shift of economic activity being directed toward the services sector is also evident in the the January ISM Services Index released on Friday, which showed the largest monthly gain since mid-2020. The advance puts the gauge firmly back in expansion territory after falling into contraction briefly toward the end of 2022. This compares to January Manufacturing PMI that contracted for a third straight month.
Again, it’s more evidence that demand is shifting away from goods to services. This is at least somewhat a result of the Fed’s interest rate hikes undermining demand for higher ticket items that are typically bought on credit. Keep in mind, even though wages run much lower across the services industry, the sector nonetheless accounts for more than two-thirds of the US economy.
The next test for inflation will be the January Consumer Price Index (CPI) next Tuesday, February 14. This week won’t provide much in the way of new insights. The most consequential to investors will be the preliminary read on February Consumer Sentiment on Friday. There is no data of note today.
Turning to earnings, we are about halfway through the Q4 season with S&P 500 companies on track for an earnings decline of -5.3%, according to FactSet. That has slipped from -5.1% last week and compares to expectations for a decline of -3.3% at the end of the fourth quarter. There are some worries that the tech sector and other high-growth stocks may begin to falter again after rallying strongly so far this year. The S&P 500’s information sector is up by nearly +15% this year but insiders are worried about maintaining those gains after disappointing results from big names like Apple, Alphabet, and Amazon, as well as ongoing uncertainty over the Fed’s interest rate hiking campaign.
Earnings results are due today from Activision Blizzard, IDEXX Laboratories, Loews, ON Semiconductor, Simon Property Group, and Tyson Foods.
Moral of the story… Bulls point to the fact there seems to be a lot more talk inside the trade that the Fed could be cutting rates at a fairly aggressive pace by the end of this year. On the flip side, bears continue to argue that the labor market is going to remain hot and that wage inflation will continue to keep the Fed worried and mostly hawkish as it battles to tame the inflationary dragon.
Even Disney workers are demanding a pay raise despite the stock being hammered this past year. From what I understand, the 32,000 Disney employees, which belong to six different unions, were urged by union leadership to vote no to an offer that would’ve given them at least a +$1 per-hour raise each year over the five-year contract life. An estimated 96% of the voters said “no” as Union negotiators are demanding an immediate +$3 per hour raise, which would be a +20% pay hike for the 75% of workers already earning +$15 an hour.
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