Snowballs In Hell

Expectations for an angry, vengeful, hawkish Fed shift will be weighed against top-tier US data in the new week.

If past is precedent, March will be preceded by February this year, leaving investors, traders and Fed officials to wait weeks for liftoff. Put differently, the next six weeks will feel like six months.

At the most basic level, policymakers want inflation to recede immediately. But that’s not going to happen. So, officials really need the growth data to hold up, or even come in hot, lest the best laid plans for policy tightening should collide head-on with a cooling economy.

I’ve written voluminously about that, and you can expect it to get picked up by mainstream financial media outlets posthaste in the event the incoming data prints are underwhelming, à la the latest read on retail sales which, you might recall, was abysmal.

It’s not just that the economy may not “fund” the Fed’s planned tightening cycle. The curve might not countenance it either. We’ll see. The new week will be a crash course (hopefully not in a literal sense) in juxtaposing crucial data with market pricing for rapid policy tightening.

ISM manufacturing is up on Tuesday, and consensus expects a deceleration to 57.6, which would mark the weakest read since September of 2020. Morgan Stanley’s Mike Wilson last week suggested stocks have “meaningful” downside on weaker PMIs.

“Our economics team now projects the headline ISM manufacturing PMI for January to come in around 54.8,” Wilson wrote. That alone would imply additional downside for stocks.

Flash reads on IHS Markit’s indexes for this month suggested the US economy is at “a near standstill.” The services gauge was particularly weak. ISM services is on deck Thursday, and consensus is looking for a still-hot 59.5. Note that some observers were skeptical of the big Q4 GDP beat given the outsized contribution from inventories.

Friday brings January payrolls. Predicting the headline print in the pandemic era has been an exercise in abject futility. In fact, it’s become so frustrating that one wonders why anyone bothers. It’s always fun to lampoon consensus when the median is woefully off the mark, but when it comes to payrolls post-COVID, “lament” is a better word than “lampoon” vis-à-vis economists’ inability to deliver accurate forecasts consistently. The idea of ADP as a guide is now a standing joke.

For whatever it’s worth — which, again, is nothing — consensus is looking for 150,000 on the headline (figure below).

With the exception of December 2020, a month marred by the vicious third COVID wave, that would be the weakest print since the onset of the pandemic.

Recall that December’s headline was a wild miss, but interpretation was complicated by a familiar set of contradictions. The Labor Department will release its annual benchmark update this week, which squares the jobs numbers with state unemployment tax records.

Like recent jobless claims reports, NFP will be affected by the Omicron wave. That means Fed officials will have an excuse to “look through” a poor headline print and focus on average hourly earnings, which is pretty much guaranteed to underscore the risk of a wage-price spiral.

The AHE update will be assessed in the context of Q4 ECI which, notwithstanding a cooler-than-expected headline, was generally seen as validating the Fed’s newfound hawkishness.

“While markets reacted to the below-consensus headline employment cost index number with relief, private industry wages and salaries excluding incentive paid occupations — which we include in our wage tracker because it provides a less noisy measure of the underlying trend — rose at a 5.7% quarterly annualized pace in Q4,” Goldman wrote late last week, commenting on ECI. “Averaging across that measure and our composition-adjusted measure of average hourly earnings, wage growth now appears to have run close to 6% over the last half year,” the bank said. “Even after netting out 2% productivity growth, the current pace of wage growth is too hot to be consistent with the Fed’s 2% inflation goal.”

JOLTS data for December is due Tuesday. It’ll provide fodder for myriad “Great Resignation” headlines, likely heightening anxiety over labor market distortions although, as with NFP, it’ll be bedeviled by Omicron and thus impossible to parse.

Plainly, it’s not possible for human beings to process all of this. Everything is relevant, but everything is distorted, and at the current juncture, every data point has to be assessed based on the read-through for the reaction function of the Fed, a panel of technocrats who are just as confused as the rest of us, if not more so.

Speaking of technocrats, Thursday brings policy decisions from both the BOE and the ECB. The BOE will probably deliver another rate hike which would open the door to balance sheet rundown. It would be the first time the bank has raised rates at consecutive meetings in 17 years. Data out earlier this month showed UK inflation ran at an alarming 5.4% pace in December. The ECB, meanwhile, will endeavor to explain why patience is still warranted, despite some challenging math around the GC’s benign forecasts.

I’m not going to sugarcoat things. If you’re not waist-deep in all of this, where that means willing to spend every waking hour immersed in it with no exceptions or breaks for anything, you’ve got no chance. Average investors, Reddit day-traders and “everyday” people in general haven’t a snowball’s chance in hell of trading tactically in this kind of environment. It’s a total crapshoot.

If that’s you, your best bet is to buy low-cost index funds (if you’re inclined to be constructive after January’s fireworks) or just sit this one out entirely if you’re still bearish, because those puts you might be thinking of buying could be incinerated in the event spot were to lurch higher, triggering a crash-up, even as the overarching mood ostensibly argues for additional downside.