Market Note – April 9, 2024

By Hightower Great Lakes on April 9, 2024

Jobs, Jobs, Jobs

Job creation in March blew through expectations, with 303,000 new jobs added in the month, beating the consensus estimate of 205,000. The two-month net revisions showed further strength, revising payrolls upward by 22,000 jobs, with the unemployment rate falling 0.1 percentage point to 3.8%.

Over the past four months, the economy has added an average of 280,000 new jobs per month, well above the 10-year average of 167,000 per month.[1] Importantly on the inflation front, average hourly earnings rose in line with consensus and grew 4.1% y/y in March. Average hourly earnings have been trending lower and are down from peak levels of 5.9% y/y in March 2022.

Yet, average wage gains are still above the trailing 10-year average of 3.5% y/y, showing that U.S. labor earnings growth is still above trend. This is the sticky part of inflation which will likely keep the Fed from easing rates more than 2-3x this year and is why the markets have stalled out lately as investors recalibrate the Fed’s easing cycle. We would not be surprised to see the Fed pause altogether on rates this year but remain data-dependent just like the committee. 

The data last week supports the argument we have made for the past couple years now: the U.S. economy is resilient and in an upward trending cycle. Job growth is strong, wage gain is steady and inflation is coming down.

Treasury yields moved higher across the curve throughout last week with the 10-year yield up nearly 14% year-to-date. Last December, the 10-year bottomed out at 3.79%, and now it sits at 4.40%. Bond markets are clearly trying to digest a higher-for-longer environment, and the question now turns to what the Fed will decide ­­­­to do with the policy rate this year.

In its March meeting, the consensus was for three 25 bp cuts in 2024, followed by another 75 bps of cuts in 2025. Market participants believe this might be unrealistic given the sustained strength of the U.S. consumer and economy, with futures markets now pricing in only 60 bps worth of cuts this year.

We are in the camp that regardless of whether the Fed cuts one, two, three or even zero times this year, it largely will not have a major implication on fundamentals. The Fed raised interest rates from near zero to 5.5% in 18 months, the fastest pace our economy has ever seen.

A recession was the consensus call last year given this unprecedented move in rates – something we didn’t subscribe to given the underlying strength in the labor market and the consumer, which represents 70% of U.S. GDP. In fact, U.S. GDP accelerated to 3.4% in 2023 and is currently running at 2.8% according to the Atlanta Fed.

The consumer remains the bright spot for our economy along with the mini manufacturing renaissance driven by fiscal policies put in place tied to onshoring and supply chain construction, as well as the clean/green initiatives. As a result, earnings have continually beaten expectations – on pace for double digit growth this year.

The Fed’s decision to cut 0-75 bps this year after the persistent economic strength should not have a considerable impact on economic activity. Our base case is the Fed will not cut rates until the fall or later, as there is likely not a need under current expansionary conditions.

Chart 1: Wage Growth Has Been Outpacing Inflation Since July 2023[2]

Fed Commentary Fills Headlines

Last week we heard from several Federal Reserve members regarding their stances on rate cuts, inflation and the economy. Chairman Powell spoke mid-week at Stanford, repeating previous sentiment of needing further data before making a policy decision.

Powell noted, “…we have time to let the incoming data guide our decision on policy,” as he continued to state that recent data does not change the backdrop of solid growth, a strong and rebalancing labor market and inflation trending down to the Fed’s 2% goal. Furthermore, he said that policy makers broadly agree that rates can fall later this year given that inflation data continues to trend lower.

In March, all Fed members agreed that at least some rate cuts are warranted to come this year, but this idea is starting to shift for some members.

Thursday, Minneapolis Fed President Neel Kashkari said, “If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,” referencing his previous belief for the likelihood of two 25 bp cuts this year. He even stated that further rate increases are not off the table, although not a likely scenario as of right now.[3]

While the possibility of no rate cuts this year is not the consensus, it is becoming a more popular view as economic data continually shows a strengthening economy. The Fed may begin to question the necessity of lowering the policy rate this year if growth continues at the current above-trend pace.

With that said, we believe the economy and, more importantly, earnings will remain solid regardless of how many cuts the Fed implements this year.

Following Friday’s jobs data, a couple Fed members shared their opinions on the economy and 2024 outlook. Dallas Fed President Lorie Logan mentioned concern regarding upside risk to inflation and believes it is too soon to begin discussing rate cuts.

Additionally, she said the resiliency of the economy has been remarkable amidst increasing interest rates, and that the economy has the possibility to increase productivity and activity without generating additional price pressure.[4] Richmond Fed President Thomas Barkin praised the strength of the job market, noting that the unemployment rate has been below 4% for 26 months in a row, the longest streak since the late 1960’s.[5]

Some Fed officials are now siding with the notion that rate cuts might not be as necessary as previously thought. Continued economic prosperity shows that the economy can withstand higher rates, ultimately a benefit for earnings and overall growth.

The March inflation data this week will provide further insight into the inflation story. CPI is expected to come in at 3.4% y/y, up from 3.2% y/y in February. Core CPI is expected to tick down to 3.7% y/y from 3.8% y/y last month. March FOMC minutes will be released Wednesday afternoon, which should assist in navigating the current sentiment of Fed members.

Fixed Income

U.S. Treasuries sold-off aggressively through the week following both strong March ISM manufacturing and payroll data coupled with hawkish Fed speak that continues to push back bets for the first rate cut.

The U.S. 2-year Treasury yields rose by 15 bps, and the 10- and 30-year yields both rose by 20 bps. High yield spreads remain tight at +348 bps. Municipal yields followed Treasuries, increasing by 10-12 bps across the curve.

The Week Ahead

Earnings – Thursday: KMX, STZ; Friday: BLK, JPM, WFC, C, STT.

Economics – Tuesday: NFIB Small Business Index, API Crude Inventories; Wednesday: March CPI, March FOMC Minutes; Thursday: March PPI, Jobless Claims; Friday: Michigan Consumer Sentiment.

Return for Selected Indices^[6]

Click here to read last week’s Market Note (4/1).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of April 7, 2024.

[2] Source: FactSet. As of April 7, 2024.

[3] Source: Reuters. As of April 4, 2024.

[4] Source: Reuters. As of April 5, 2024.

[5] Source: Reuters. As of April 5, 2024.

[6] Source: Bloomberg. As of April 8, 2024.