Jerome Powell is undoubtedly the focal point for markets in the new week. The FOMC isn’t the only game in town, though.
Although the largest Fed hike in decades is the marquee event, traders will also be compelled to digest the usual slate of top-tier data that defines the first week of a new month.
April payrolls are expected to show the US added 400,000 more jobs (figure below), extending a string of robust gains and bolstering sundry narratives about labor market tightness and a “resilient” economy.
Recall that March’s NFP report was accompanied by sizable positive revisions, a rock-bottom unemployment rate and a slight uptick in participation.
An encore and any (more) evidence of upward pressure on wages would retroactively validate the upsized rate hike the Fed is expected to deliver two days prior. Policymakers have largely given up on the idea that participation will return to the pre-pandemic demographic trend. At this point, it would take an unthinkable series of NFP misses to force a material rethink of the rate trajectory.
Additional signs of labor market tightness will come Tuesday, when March JOLTS will validate the “funhouse mirror” characterization of the US economy. Expect the gap between open positions and hires to remain near record wides. The figure (below) shows where things stood as of the last JOLTS figures.
There are more open jobs than there are Americans counted as unemployed. That’ll continue to be the case for the foreseeable future.
Still, I’d be remiss not to note that remarks from Amazon (which underwhelmed on the guidance front, prompting an egregious selloff in the shares) hint at a possible hidden overcapacity problem lurking beneath the veneer of a constrained, overheating economy.
Amazon saying it had too much warehouse space & too many workers last quarter is a bad omen. It suggests America's "constrained" economy may be sitting on a huge overcapacity problem that nobody knows exists yet, but which will become apparent when demand slows.
— Heisenberg Report (@heisenbergrpt) April 29, 2022
File that away somewhere — you may need to reference it later this year.
In addition to updates on the labor market, ISM manufacturing and services are due. A poor read on the former will perpetuate fears of additional losses for US equities, which are coming off their worst month since the onset of the pandemic.
The figure (below) compares apples to oranges. Some analysts would quibble with that critique, but a gauge of stock prices is not a survey of factory managers.
“Chart crime” accusations and caveats aside, the visual is good eye candy. Note that stocks have already done some catching down.
In addition, traders will eye the quarterly refunding announcement, which provides analysts an opportunity to juxtapose supply with the imminent abatement of demand from a price insensitive buyer (i.e., the Fed, which in addition to hiking rates 50bps on Wednesday, will formally unveil plans to proceed with balance sheet runoff).
“The timing of the FOMC and Treasury Department’s refunding announcement means Yellen won’t have the required information to adjust issuance plans resulting from what will be likely be $60 billion less Fed reinvestment per month [and] while that doesn’t preclude the TBAC details from discussing when coupon sizes will ultimately need to start increasing, further cuts to coupons are broadly anticipated to be revealed on Wednesday morning,” BMO’s Ian Lyngen and Ben Jeffery wrote. “From a longer-term perspective, the situation on Capitol Hill should also give the Treasury a bit more flexibility given that any renewed fiscal push is increasingly unlikely,” they added, noting that “even before the midterms and what is assumed to be a change in control in at least one of the chambers of Congress, at this stage the bulk of the stimulus from the fiscal side has played out.” If you doubt that latter assessment, just ask Joe. Manchin. Not Biden.
“Funding needs are likely to change with the SOMA portfolio runoffs, but not for the remainder of this year,” SocGen’s Subadra Rajappa wrote. The bank sees Treasury cutting note and bond issuance sizes by $1 billion across the curve with the exception of the 20-year, which should see a $2 billion cut. “After this quarter, we expect issuance sizes to be unchanged for the remainder of the year,” Rajappa added.
“We think the market should already be priced for an imminent end to coupon auction size cuts, leaving the focus at the refunding on how Treasury funds runoff,” TD’s Gennadiy Goldberg said. “We expect duration supply to remain elevated while demand from some key buyers (such as US banks and mutual funds) declines.”
This comes amid pervasive uncertainty in the bond market. Two-year yields have risen for nine months in a row (figure on the left, below), the longest streak since at least the 70s.
Meanwhile, the MOVE remains elevated near local highs (simple figure on the right, above).
Although some analysts expect a near-term reprieve for beleaguered equities after the Fed event risk clears, clarity on the outlook for the economy isn’t forthcoming. That uncertainty will continue to find expression in rates.
“I struggle with the notion that the economy can handle continued hikes beyond neutral and QT,” TD’s Misra told Bloomberg. BMO’s Lyngen echoed that assessment. “If GDP fell in Q1 (caveated by trade and inventories’ impact), we struggle to craft a compelling argument for an improving growth outlook given that Powell’s commitment to combat inflation has been unshaken by the specter of a materially decelerated expansion,” he said.
