Who to Believe? Jerome Powell or the Markets?

Last Friday provided a split-screen view of the markets and the Federal Reserve.

Fed Chairman Jerome Powell sought to tamp down some of the exuberance among investors that the central bank is done with raising interest rates and will begin cutting them next year, telling an audience at Spelman College that “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”

The markets responded with a shrug and promptly pushed the S&P 500 index to a new 2023 high.

“Investors are increasingly pricing in the start of interest rate cuts in the coming year, while the Fed is lightly pushing back on this view in fear of financial conditions easing too rapidly, as Chair Powell remarked on Friday,” William Blair macro analyst Richard de Chazal wrote in his weekly market note on Monday.

“Futures market participants are now attaching a 55.1% probability of a rate cut at the March 2024 FOMC meeting; that’s a considerable change from just one week ago when they were attaching a 21% probability to such a change. What gives?” de Chazal asked. “While investors are still in the grip of an immaculate disinflation/soft-landing narrative, we have seen greater evidence of a further weakening of growth over the last few weeks.”

This week presents another opportunity for the markets to weigh in on economic data that is crucial to the Fed’s continuing campaign to bring inflation down to its 2% annual target. There will be a variety of reports on the health of the labor market that will show whether it and the economy are slowing down as the Fed would like, especially after last week’s reading that third-quarter gross domestic product rose at a 5.2% rate, higher even than earlier believed.

Some are forecasting that November’s job number due out on Friday might even surprise to the upside, given that workers who were on strike in October – notably the United Auto Workers as well as movie and TV actors – returned to their jobs. There is also a seasonal adjustment to the data that will occur. Combined, that could bring November’s job growth to around 230,000.

“For November, we look for nonfarm payrolls to jump above the 3- and 6-month moving averages (both around 205K) by 230K jobs, notably reflecting the end of the UAW and Hollywood strikes last month, “ said Sam Bullard, managing director and senior economist at Wells Fargo’s corporate and investment banking group. “Indeed, we look for the return of striking workers to add nearly 45K jobs to November’s payrolls. Another potential boost to payrolls may come from the seasonal adjustment process.”

But, Bullard added, “job growth is narrowing, with the number of industries reporting increased headcount residing at its lowest level in more than two-and-a-half years.”

The run of data kicks off on Tuesday with the release of job opening numbers for late October, with expectations that it will show a drop to 9.3 million from the prior month’s 9.6 million reading. Wednesday brings the first measure of the November job market when private payroll firm ADP releases its monthly survey of employers. Forecasts are for a number around 120,000, up slightly from the 113,000 in October.

But it will be the Labor Department’s report on November employment on Friday that garners the most interest. October came in at 150,000, a drop from the recent trend of around 200,000 jobs added per month. Consensus forecasts are for a reading close to 180,000.

That should tee up nicely for the Fed’s meeting next week, with most economists and market analysts predicting the central bank will hold rates steady as they did in November.

“Both sides of the Fed’s mandate are moving toward their longer-run estimated levels,” Wells Fargo wrote in a commentary on Monday. “The labor market is becoming less tight, and inflation continues to recede. That said, inflation has not yet receded all the way back to 2%. Consequently, we expect the post-meeting statement will keep the door open to the possibility of additional tightening this cycle. However, while the statement likely will indicate that further tightening remains possible, we would not be surprised for it to hint that another rate hike is less probable.”

Also Friday, the preliminary University of Michigan consumer sentiment index for December will be released. Forecasts are for a slight improvement in the outlook of consumers, given recent easing in gasoline prices and overall inflation. But the measure, along with other readings on the consumer, have proven to be too negative compared to actual consumer behavior. Over the Thanksgiving holiday, consumers rushed to stores and especially online to spend ahead of the critical Christmas shopping season.